(1)
Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
To journalize: The purchase $240,000,000 of 6% bonds in the books of Corporation T
(1)
Answer to Problem 12.5E
Prepare journal entry for purchase of $240,000,000 of 6% bonds for $200,000,000.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2018 | |||||
July | 1 | Investment in Bonds | 240,000,000 | ||
Discount on Bond Investment | 40,000,000 | ||||
Cash | 200,000,000 | ||||
(To record purchase of investment) |
Table (1)
Explanation of Solution
- Investment in Bonds is an asset account. Since bonds investments are purchased, asset value increased, and an increase in asset is debited.
- Discount on Bond Investment is a contra-asset account. The contra-asset account generally has a credit balance. So, credit the discount, indicating a reduction in carrying amount of bonds to the cost.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Working Notes:
Compute the discount amount on bonds.
(2)
To journalize: The receipt of semiannual interest on December 31, 2018 in the books of Corporation T
(2)
Answer to Problem 12.5E
Prepare journal entry for semiannual interest on December 31, 2018.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2018 | |||||
December | 31 | Cash | 7,200,000 | ||
Discount on Bond Investment | 800,000 | ||||
Interest Revenue | 8,000,000 | ||||
(To record receipt of interest) |
Table (2)
Explanation of Solution
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Discount on Bond Investment is a contra-asset account. The contra-asset account generally has a credit balance. Since the discount amount is reduced, the account is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Calculate interest received on December 31, 2018.
Calculate interest revenue on December 31, 2018.
Calculate discount amortized on December 31, 2018.
Note: Refer to Equations (1) and (2) for the value and computations of interest revenue and interest received.
(3)
To prepare: The journal entry to adjust the trading securities to fair value as on December 31, 2018 in the books of Corporation T
(3)
Answer to Problem 12.5E
Prepare journal entry to adjust the trading securities to fair value as on December 31, 2018.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2018 | |||||
December | 31 | Fair Value Adjustment | 9,200,000 | ||
Unrealized Holding Gain–NI | 9,200,000 | ||||
(To record unrealized gain on trading securities) |
Table (3)
Explanation of Solution
- Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on the reported date.
- Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, stockholders’ equity value is credited.
Working Notes:
Compute the unrealized gain (loss) as on December 31, 2018.
Step 1: Determine the amortized cost of bonds as on December 31, 2018.
Particulars | Amount ($) | Amount ($) |
Investment in bonds | $240,000,000 | |
Less: Unamortized discount: | ||
Discount on bonds | $40,000,000 | |
Less: Amortized discount in the year | (800,000) | (39,200,000) |
Amortized cost | $200,800,000 |
Table (4)
Step 2: Compute the unrealized gain (loss) as on December 31, 2018 by adjusting the amortized cost of $200,800,000 (Refer to Table-4) to the fair value of $210,000,000.
Details | Amount ($) |
Fair value adjustment balance as on July 1, 2018 | $0 |
Adjustment needed to update fair value (Balancing figure) | 9,200,000 |
Fair value adjustment balance needed on December 31, 2018
|
$9,200,000 |
Table (5)
(4)
To journalize: The sale of bonds on January 2, 2019 in the books of Corporation T
(4)
Explanation of Solution
Explanation
Step 1: Prepare journal entry to adjust the trading securities to fair value as on January 2, 2019.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2019 | |||||
January | 2 | Unrealized Holding Loss–NI | 20,000,000 | ||
Fair Value Adjustment | 20,000,000 | ||||
(To record unrealized loss on trading securities) |
Table (6)
- Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
- Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on sale date.
Working Notes:
Compute the unrealized gain (loss) as on January 2, 2019 by adjusting the amortized cost of $200,800,000 (Refer to Table-4) to the fair value of $190,000,000.
Details | Amount ($) |
Fair value adjustment balance as on December 31, 2018 (Table-5) | $9,200,000 |
Adjustment needed to update fair value (Balancing figure) | (20,000,000) |
Fair value adjustment balance needed on January 2, 2019
|
$(10,800,000) |
Table (7)
Step 2: Prepare journal entry for sale of bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2019 | |||||
January | 2 | Cash | 190,000,000 | ||
Fair Value Adjustment | 10,800,000 | ||||
Discount on Bond Investment | 39,200,000 | ||||
Investment in Bonds | 240,000,000 | ||||
(To record sale of bonds) |
Table (8)
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited because the sale proceeds adjusted to fair value on the date of sale, realizes loss.
- Discount on Bond Investment is a contra-asset account. The contra-asset account generally has a credit balance. Since the discount amount is closed on the sale date, the account is debited to make the discount balance zero.
- Investment in Bonds is an asset account. Since investments are sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Refer to requirement 3 for value and computation of discount amortized.
Compute the gain (loss) on sale of bonds.
Step 1: Compute the book value of bonds as on January 2, 2019.
Particulars | Amount ($) |
Investment in bonds | $240,000,000 |
Less: Unamortized discount | (39,200,000) |
Book value as on January 2, 2019 | $200,800,000 |
Table (9)
Step 2: Compute gain or loss on sale of bonds as on January 2, 2019.
Particulars | Amount ($) |
Cash proceeds from sale of bonds | $190,000,000 |
Less: Book value as on January 2, 2019 (Table-9) | (200,800,000) |
Gain (loss) on sale of investment | $(10,800,000) |
Table (10)
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Chapter 12 Solutions
INTERMEDIATE ACCT.(LL)W/CONNECT ACCESS
- This is a variation of E 12–1 focusing on available-for-sale securities.]Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July1, 2018. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200million for the bonds. The company will receive interest semiannually on June 30 and December 31. Companymanagement has classified the bonds as available-for-sale investments. As a result of changing market conditions,the fair value of the bonds at December 31, 2018, was $210 million.Required:1. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018.2. Prepare the journal entries by Tanner-UNF to record interest on December 31, 2018, at the effective (market)rate.arrow_forwardE17.3 (LO 1) (Entries for Held-to-Maturity Securities) On January 1, 2020, Hi and Lois Company purchased 12% bonds having a maturity value of $300,000 for $322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Hi and Lois Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category. Instructions a. Prepare the journal entry at the date of the bond purchase. b. Prepare a bond amortization schedule. c. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2020. d. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2021. E17.4 (LO 1) (Entries for Available-for-Sale Securities) Assume the same information as in E17.3 except that the securities are classified as available-for-sale. The fair value of the…arrow_forwardE16.7 (LO 1, 2) (Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entry or entries required to record each transaction. 1. Coyle SA issued €10,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company's investment banker determines that they would have been sold at 95. 2. Lambert AG issued €10,000,000 par value 10% bonds at 98. One share warrant was issued with each €100 par value bond. The net present value of the bonds without the warrants was €9,600,000. 3. Sepracor AG called its convertible debt in 2022. Assume the following related to the transaction. The 11%, €10,000,000 par value bonds were converted into 1,000,000 shares of €1 par value ordinary shares on July 1, 2022. The carrying amount of the debt on July 1 was €9,700,000. The Share Premium-Conversion Equity account had a balance of €200,000, and the company paid an additional €75,000 to the bondholders to induce conversion of all…arrow_forward
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- 35 On January 1, 2020, Alaska Corporation purchased P1,000,000 10% bonds for P1,051,510 (including broker’s commission of P20,000). Interest is payable annually every December 31. The bonds mature on December 31, 2022. The prevailing market rate for the bonds is 9% at December 31, 2020. If the bonds are classified as FA@FVTPL, the amount to be recognized as fair value adjustment loss in its 2020 profit or loss isarrow_forward11. On January 1, 2020, Alaska Corporation purchased P1,000,000 10% bonds for P1,051,510 (including broker’s commission of P20,000). Interest is payable annually every December 31. The bonds mature on December 31, 2022. The prevailing market rate for the bonds is 9% at December 31, 2020. If the bonds are classified as FA@AC, the amount to be reported on the entity’s December 31, 2020 statement of financial position is Group of answer choices P1,025,330 P1,017,610 P1,034,340 P1,035,630arrow_forwardExercise 12-6 (Algo) Trading securities [L012-1, 12-3] Mills Corporation acquired as an investment $200 million of 7% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Mills paid $240 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 $210 million. Required: 1. & 2. Prepare the journal entry to record Mills investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate. 3. Prepare the journal entry by Mills to record any fair value adjustment necessary for the year ended December 31, 2021. 4. Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2022, for $250 million. Prepare the journal…arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning