1.
Financial statement analysis:
The company and its users use financial analysis as a way to analyze the company’s financial statements to make investment and business decisions. There are four financial statements that any company should produce for its users for analysis. These are the income statement, balance sheet, cash flow statement and
To prepare:
1.
Explanation of Solution
Journal entries are prepared as follows:
Date | Account title and explanation | Debit ($) | Credit ($) |
Year 1 | |||
Mar. 10 | Debt investment − AFS | 30,600 | |
Cash | 30,600 | ||
(to record the purchase of bond) | |||
Apr. 7 | Debt investment − AFS | 56,250 | |
Cash | 56,250 | ||
(to record the purchase of bond) | |||
Sep. 1 | Debt investment - AFS | 28,200 | |
Cash | 28,200 | ||
(to record the purchase of bond) | |||
Dec. 31 | Fair value adjustment − AFS | 1,950 | |
Unrealized gain − equity | 1,950 | ||
(to record the fair value adjustment) | |||
Year 2 | |||
Apr. 26 | Cash | 51,250 | |
Loss on sale of debt investment | 5,000 | ||
Debt investment - AFS | 56,250 | ||
(to record the sale of bonds on cash) | |||
June 2 | Debt investment - AFS | 34,650 | |
Cash | 34,650 | ||
(to record the purchase of bonds) | |||
June 14 | Debt investment − AFS | 25,200 | |
Cash | 25,200 | ||
(to record the purchase of notes) | |||
Nov. 27 | Cash | 30,600 | |
Gain on sale of debt investment | 2,400 | ||
Debt investment − AFS | 28,200 | ||
(to record the sale of bonds) | |||
Dec. 31 | Unrealized gain − equity | 1,400 | |
Fair value adjustment − AFS | 1,400 | ||
(to record the fair value adjustment) | |||
Year 3 | |||
Jan. 28 | Debt investment − AFS | 40,000 | |
Cash | 40,000 | ||
(to record the purchase of bond) | |||
Aug. 22 | Cash | 25,800 | |
Loss on sale of debt investment | 4,800 | ||
Debt investment − AFS | 30,600 | ||
(to record the sale of bonds on cash) | |||
Sep. 3 | Debt investment − AFS | 84,000 | |
Cash | 84,000 | ||
(to record the purchase of bonds) | |||
Oct. 9 | Cash | 28,800 | |
Gain on sale of debt investment | 3,600 | ||
Debt investment − AFS | 25,200 | ||
(to record the sale of bonds) | |||
Oct. 31 | Cash | 27,000 | |
Loss on sale of debt investment | 7,650 | ||
Debt investment − AFS | 34,650 | ||
(to record the sale of bonds) | |||
Dec. 31 | Fair value adjustment - AFS | 5,450 | |
Unrealized gain − equity | 5,450 | ||
(to record the fair value adjustment) |
Working notes:
Year 1
Company | Cost ($) | Fair value ($) | Difference ($) |
A | 30,600 | 33,000 | 2,400 |
F | 56,250 | 54,600 | (1,650) |
P | 28,200 | 29,400 | 1,200 |
Total | 115,050 | 117,000 | 1,950 |
Year 2
Company | Cost ($) | Fair value ($) | Difference ($) |
A | 30,600 | 31,000 | 400 |
D | 34,650 | 32,400 | (2,250) |
S | 25,200 | 27,600 | 2,400 |
Total | 90,450 | 91,000 | 550 |
Fair value adjustment account: | |||
Required balance | $550 | ||
Existence balance | ($1,950) | ||
Required change | $1,400 |
Year 3
Company | Cost ($) | Fair value ($) | Difference ($) |
C-C | 40,000 | 48,000 | 8,000 |
M | 84,000 | 82,000 | (2,000) |
Total | 124,000 | 130,000 | 6,000 |
Fair value adjustment account: | |||
Required balance | $6,000 | ||
Existence balance | ($550) | ||
Required change | $5,450 |
2.
Financial statement analysis:
The company and its users use financial analysis as a way to analyze the company’s financial statements to make investment and business decisions. There are four financial statements that any company should produce for its users for analysis. These are the income statement, balance sheet, cash flow statement and stockholders’ equity statement.
To prepare: Table showing (a) total cost (b) total fair value adjustment (c) total fair value of portfolio.
2.
Explanation of Solution
The table is prepared as follows:
Requirement | Debt investment | Year 1 ($) | Year 2 ($) | Year 3 ($) |
(a) | Long term AFS securities (cost) | 115,050 | 90,450 | 124,000 |
(b) | Fair value adjustment − AFS | 1,950 | 550 | 6,000 |
(c) | Long term AFS security (fair value) | 117,000 | 91,000 | 130,000 |
3.
Financial statement analysis:
The company and its users use financial analysis as a way to analyze the company’s financial statements to make investment and business decisions. There are four financial statements that any company should produce for its users for analysis. These are the income statement, balance sheet, cash flow statement and stockholders’ equity statement.
To prepare:Table showing (a) realized gains or losses and (b) unrealized gains or losses.
3.
Explanation of Solution
The table showing realized and unrealized gain or losses are prepared as follows:
Particular | Year 1 ($) | Year 2 ($) | Year 3 ($) |
Realized gain or (losses) | |||
Sale of F | (5,000) | ||
Sale of P | 2,400 | ||
Sale of A | (4,800) | ||
Sale of S | 3,600 | ||
Sale of D | (7,650) | ||
Total realized gain or (losses) | 0 | (2,600) | (8,850) |
Unrealized gains or (losses) | 1,950 | 550 | 6,000 |
Want to see more full solutions like this?
Chapter C Solutions
FINANCIAL ACCT.FUNDAMENTALS <CUSTOM LL>
- MASTERY PROBLEM Jackson, Inc.s fiscal year ends December 31. Selected transactions for the period 20-1 through 20-8 involving bonds payable issued by Jackson are as follows: 20-1 Oct. 31 Issued 600,000 of 10-year, 7%, callable bonds dated October 31, 20-1, for 612,000. Interest is payable semiannually on October 31 and April 30. The bond indenture provides that Jackson is to pay to the trustee bank 20,000 by May 15 of each year (except the tenth year) as a sinking fund for the retirement of the bonds on call or at maturity. Dec. 31 Made the adjusting entry for interest payable and amortized two months premium on the bonds (straight-line method). 20-2 Jan. 2 Reversed the adjusting entry for interest payable and bond premium amortization. Apr. 30 Paid the semiannual interest on the bonds and amortized six months premium. May 15 Paid the sinking fund trustee 20,000. Oct. 31 Paid the semiannual interest on the bonds and amortized six months premium. Dec. 31 Made the adjusting entry for interest payable and amortized two months premium on the bonds. 31 Sinking fund earnings for the year were 900. 20-8 May 15 Paid the sinking fund trustee 20,000. Oct. 31 Paid the semiannual interest on the bonds and amortized six months premium. 31 Redeemed the bonds, which were called at 97. The balance in the bond premium account is 3,600 after the payment of interest and amortization of premium have been entered. The cash balance in the sinking fund is 200,000, which is applied to the redemption. Jackson paid the sinking fund trustee the additional cash needed to pay off the bonds. (Hint: First make the entry for payment to the sinking fund, then make the entry for redemption of the bonds.) REQUIRED 1. Enter the preceding transactions in general journal form. 2. Calculate the carrying value of the bonds as of December 31, 20-2.arrow_forwardTransfer between Categories On December 31, 2018, Leslie Company held an investment in bonds of Kaufmann Company which it categorized as being held to maturity. At that time, the 8%, 100,000 face value bonds had a carrying value of 107,023.56 and were being amortized using the effective interest method based on a market rate of 7%. Interest on these bonds is paid annually each December 31. On December 31, 2019, after recording the interest earned, Leslie decided to reclassify the Kaufmann bonds to its available-for-sale category in anticipation of a major restructuring. At that time, the ending quoted market price for the bonds was 105,000. Required: Prepare the journal entries on December 31, 2019, to record the interest earned and the reclassification.arrow_forwardWilbury Corporation issued 1 million of 13.5% bonds for 985,071.68. The bonds are dated and issued October 1, 2019, are due September 30, 2020, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14%. Required: 1. Prepare a bond interest expense and discount amortization schedule using the straight-line method. 2. Prepare a bond interest expense and discount amortization schedule using the effective interest method. 3. Prepare adjusting entries for the end of the fiscal year December 31, 2019, using the: a. straight-line method of amortization b. effective interest method of amortization 4. If income before interest and income taxes of 30% in 2020 is 500,000, compute net income under each alternative. 5. Assume the company retired the bonds on June 30, 2020, at 98 plus accrued interest. Prepare the journal entries to record the bond retirement using the: a. straight line method of amortization b. effective interest method of amortization 6. Compute the companys times interest earned (pretax operating income divided by interest expense) for 2020 under each alternative.arrow_forward
- Cornerstone Exercise 9-22 Reporting Long-Term Debt on the Balance Sheet Dennis Corp. has the following bonds: $2,000,000 in bonds that have $10,000 of unamortized discount associated with them $500,000 in bonds that have $25,000 of unamortized premium associated with them. Required: Prepare the balance sheet presentation for these two bonds.arrow_forwardCornerstone Exercise 9-23 Issuance of Long-Term Debt Anne Corp. issued $600,000, 5% bonds. Required: Prepare the necessary journal entries to record the issuance of these bonds assuming the bonds were issued (a) at par, (b) at 102, and (c) at 92.arrow_forwardInvestments in Equity Securities Noonan Corporation prepares quarterly financial statements and invests its excess funds in marketable securities. At the end of 2018, Noonans portfolio of investments consisted of the following equity securities: Dunne the first half of 2019, Noonan engaged in the following investment transactions: Required: 1. Record Noonans investment transactions for January 6 through June 30, 2019. 2. Show the items of income or loss from investment transactions that Noonan reports for each of the first and second quarters of 2019. 3. Show how the preceding items are reported on the first and second quarter 2019 ending balance sheets, assuming that management expects to dispose of the Keene and Sachs securities within the next year.arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,Financial & Managerial AccountingAccountingISBN:9781285866307Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningCorporate Financial AccountingAccountingISBN:9781305653535Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning