Financial Accounting
Financial Accounting
5th Edition
ISBN: 9781259914898
Author: SPICELAND
Publisher: MCG
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Chapter D, Problem 4PA

1.

To determine

Record the Incorporation JI’s investment on January 1.

1.

Expert Solution
Check Mark

Explanation of Solution

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Record the Incorporation JI’s investment on January 1.

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

January 01Investments 152,000 
Cash  152,000
 (To record purchase of bonds)   

Table (1)

Purchase of bonds:

  • Investments are the assets. Purchases of investments increase the assets value. Thus, investments are debited with $152,000.
  • Cash is a current asset. Purchase of bonds decreases the cash balance. Thus, cash is credited with $152,000.

2.

To determine

Record the interest revenue earned by Incorporation JI for the first six months ended June 30.

2.

Expert Solution
Check Mark

Explanation of Solution

Record the interest revenue earned by Incorporation JI for the first six months ended June 30.

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

June 30Cash (1) 7,200 
Investments (difference amount) 400 
Interest revenue (2)  7,600
 (To record semi-annual interest revenue)   

Table (2)

Interest revenue on June 30:

  • Cash is a current asset. Interest revenue increases the cash balance. Thus, cash is debited with $7,200.
  • Investments are the assets. Market rate is more than stated interest rate. It decreases the investments value. Thus, investments are credited with $400.
  • Interest revenue is a component of the stockholders’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $7,600.

Working Notes:

Calculate the cash received.

Cash received=Face value of bonds×Rate×6 months12 months=$180,000×8%×612=$7,200 (1)

Therefore, cash received is $7,200.

Calculate the interest revenue for the first six months.

Interest revenue=Carrying value of bonds×Market Rate×6months12months=$152,000×10%×612=$7,600 (2)

Therefore, the interest revenue for the first six months is $7,600.

3.

To determine

Record the interest revenue earned by Incorporation JI for the next six months ended December 31.

3.

Expert Solution
Check Mark

Explanation of Solution

Record the interest revenue earned by Incorporation JI for the next six months ended December 31:

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

December 31Cash (3) 7,200 
Investments (difference amount) 420 
 Interest revenue (4)  7,620
 (To record semi-annual interest revenue)   

Table (3)

Interest revenue on December 31:

  • Cash is a current asset. Interest revenue increases the cash balance. Thus, cash is debited with $7,200.
  • Investments are the assets. Market rate is more than stated interest rate. It increases the investments value. Thus, investments are debited with $420.
  • Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $7,620.

Working Notes:

Calculate the cash received.

Cash received=Face value of bonds×Rate×6months12months=$180,000×8%×612=$7,200 (3)

Therefore, cash received is $7,200.

Calculate the interest revenue for the next six months.

Interest revenue=Carrying value of bonds×Market Rate×6months12months=($152,000+$400)×10%×612=$7,620 (4)

Therefore, the interest revenue for the next six months is $7,620.

4.

To determine

Compute the amount of investment that would be reported by Incorporation JI in the December 31 balance sheet and explain the reason behind it.

4.

Expert Solution
Check Mark

Explanation of Solution

Incorporation JI will report its investment at its amortized cost (book value) of $152,820 ($152,000+$400+$420) in its December 31 balance sheet.

As held-to-maturity securities will not be sold until its maturity, it is irrelevant that whether there is an increase or decrease in the fair value of the securities between the time of acquiring a debt security, and the day of its maturity. Hence, it is for this reason, Incorporation JI reports its held-to-maturity securities at an amortized cost in its balance sheet rather than recording them at a fair value.

5.

To determine

Record any necessary fair value adjustment, if the investments are not intended to hold the debt securities until maturity but also has no intention to sell them any time soon.

5.

Expert Solution
Check Mark

Explanation of Solution

Available-for-sale investments: Available-for-sale investments are the investments in debt or equity securities, where the investor wishes to holds less than 20% of voting stock, and neither referred as trading or hold-to-maturity investments. For debt securities, the investor do not wish to hold it till maturity, and hence reported either as current assets or as long-term assets in the balance sheet depending upon the holding period of the security.

Record any necessary fair value adjustment:

DateAccount Title and Explanation

Post

Ref.

Debit

$

Credit

$

December 31Investments 7,180 
 Unrealized holding gain – net income (5)  7,180
 (To record the investment at  adjusted fair value )   

Table (4)

Explanation for the above journal entry:

  • Investments are the assets. There is an Increase in the investments value by $7,180 due to fair value. Thus, investments are debited with $7,180.
  • Unrealized holding gain is a component of the stockholders’ equity (net income). It increases the net income by $7,180. Thus, it is credited with $7,180.

Working notes:

Compute the unrealized holding gain – net income.

Particulars

Amount

$

Investments (book value)152,820
Less: Fair value of the investments160,000
Unrealized holding gain-net income(7,180)

(5)

Table (5)

Note: In the given situation the investments become Available for sale securities. So the unrealized holding loss reports as other comprehensive income in the current year’s income statement.

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