Concept explainers
1.
Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.
Held-to-maturity security: The debt securities which are held by the investor with intent to hold the investment till its maturity, are referred to as held-to-maturity securities.
Other-than-temporary (OTT) impairment: When the market value of an investment declines to a value lower than its cost, it is referred to as OTT impairment.
Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
To Indicate: The effect of the following scenarios on the 2018 Income Statement of Company B.
2.
To Indicate: The effect of the following scenarios on the 2018 Income Statement of Company B.
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INTERMEDIATE ACCT VOL.2>CUSTOM<
- Founded on January 1, 20X1, Gehl Company had the following passive investments in equity securities at the end of 20X1 and 20X2: Equity Security Cost 12/31/X2 Fair Value A $ 96,000 $ 94,000 B 184,000 162,000 C 126,000 136,000 Required: If the company recorded a $4,000 debit to its Fair value adjustment account as its 20X2 fair value adjustment, what must have been the unrealized gain or loss reported at the end of 20X1?arrow_forwardOn December 31, 2021, Kona purchased debt securities as trading securities. Pertinent data are as follows:\\n Fair Value\\nSecurity Cost At 12/31/22\\nA $225,000 $215,000\\nB 200,000 210,000\\nC 230,000 210,000\\nOn December 31, 2022, Kona transferred its investment in security C from trading to available‐for‐sale\\nbecause Kona intends to retain security C as a long‐term investment. What total amount of gain or loss on\\nits securities should be included in Kona's income statement for the year ended December 31, 2022?arrow_forwardOn January 1, 2020, the Evergreen Corporation purchased marketable equity securities for P2,000,000. The company also paid commission, taxes and other transaction costs amounting to P50,000. Because the securities were acquired not for immediate trading, Evergreen exercise its option to take the change in fair values through other comprehensive income. The securities had the following fair values at December 31, 2020 and 2021, respectively; P1,750,000 and P2,100,000. No securities were sold during 2020 and 2021. What amount of unrealized gain or loss should be reported in the December 31, 2021 statement of financial position as a component of shareholder’s equity.arrow_forward
- This is a variation of E12–1 focusing on the fair value option.]Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July1, 2018. Company management has the positive intent and ability to hold the bonds until maturity, but when thebonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its investment. Themarket interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 million for thebonds. The company will receive interest semiannually on June 30 and December 31. As a result of changingmarket conditions, the fair value of the bonds at December 31, 2018, was $210 million.Required:1. Would this investment be classified on Tanner-UNF’s balance sheet as held-to-maturity securities, tradingsecurities, available-for-sale securities, significant-influence investments, or other? Explain.2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018.3.…arrow_forwardS&L Financial buys and sells securities which it classifies as available-for-sale. Assume that on December 27, 2024, S&L purchased Coca-Cola bonds at par for $745,000 and sold the bonds on January 3, 2025, for $748,500. At December 31, the bonds had a fair value of $742,500, and S&L has the intent and ability to hold the investment until fair value recovers. What pretax amounts did S&L include in its 2024 and 2025 net income as a result of thisarrow_forward33. On December 31, 2018, Calm Company appropriately reported P80, 000 unrealized loss in OIC for equity securities measured irrevocably at FVOCI. Security Cost Fair value at 12/31/19 X 1, 250, 000 1, 600, 000 Y 1, 000, 000 950, 000 Z 1, 750, 000 1, 250, 000 What amount of unrealized loss is recognized in the 2019 statement of changes in equity?arrow_forward
- On August 31, 2002, Rubics Company purchased the following equity securities and irrevocably elected to measure them at fair value through other comprehensive income: Fair Value Security Cost December 31, 2002 ₱ 96,000 ₱ 84,000 152,000 158,000 162,000 146,000 On December 31, 2002, Rubics reclassified its investment in security F from fair value through other comprehensive income to held for trading securities. What total amount of loss on reclassification should be included in Rubics' income statement for the year ended December 31, 2002? 0 b. 16,000 c. 22,000 d. 28,000arrow_forward#8 ABC Company purchased $3500000 of 9%, 5-year bonds from XYZ, Inc. on January 1, 2021, with interest payable on July 1 and January 1. The bonds sold for $3624740 at an effective interest rate of 8%. Using the effective-interest method, ABC Company decreased the Available-for-Sale Debt Securities account for the XYZ, Inc. bonds on July 1, 2021 and December 31, 2021 by the amortized premiums of $11620 and $11980, respectively.On December 31, 2021, the fair value of the XYZ, Inc. bonds was $3680000. What should ABC report as other comprehensive income and as a separate component of stockholders' equity? $78860. No entry should be made. $55260. $23600.arrow_forwardLoreal-American Corporation purchased several marketable securities during 2018. At December 31, 2018, thecompany had the investments in bonds listed below. None was held at the last reporting date, December 31, 2017,and all are considered securities available-for-sale.Cost Fair ValueUnrealized HoldingGain (Loss)Short term:Blair, Inc. $ 480,000 $ 405,000 $(75,000)ANC Corporation 450,000 480,000 30,000Totals $ 930,000 $ 885,000 $(45,000)Long term:Drake Corporation $ 480,000 $ 560,000 $ 80,000Aaron Industries 720,000 660,000 (60,000)Totals $1,200,000 $1,220,000 $ 20,000Required:1. Prepare appropriate adjusting entries at December 31, 2018.2. What amounts would be reported in the income statement at December 31, 2018, as a result of these adjustingentries?arrow_forward
- Tanner-UNF Corporation acquired as a long-term investment $360 million of 8.0% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $330.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $340.0 million. Required:1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.3. At what amount will Tanner-UNF report its investment in the December 31, 2021, balance sheet?4. Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $320.0 million. Prepare the journal entry to record the…arrow_forwardTanner-UNF Corporation acquired as a long-term investment $360 million of 8.0% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $330.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $340.0 million. 4. Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $320.0 million. Prepare the journal entry to record the sale. Record the sale.arrow_forwardBloom Corporation purchased $1,000,000 of Taylor Company 5% bonds at par with the intent and ability to holdthe bonds until they matured in 2025, so Bloom classifies their investment as HTM. Unfortunately, a combinationof problems at Taylor Company and in the debt market caused the fair value of the Taylor investment to declineto $600,000 during 2018.Required:For each of the following scenarios, prepare appropriate entry(s) at December 31, 2018, and indicate how thescenario will affect the 2018 income statement (ignoring income taxes).1. Bloom now believes it is more likely than not that it will have to sell the Taylor bonds before the bonds havea chance to recover their fair value. Of the $400,000 decline in fair value, Bloom attributes $250,000 to creditlosses, and $150,000 to noncredit losses.2. Bloom does not plan to sell the Taylor bonds prior to maturity, and does not believe it is more likely thannot that it will have to sell the Taylor bonds before the bonds have a chance to…arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning