Chapter 13: Q1Q (page 658)
Question: Distinguish between debt security and equity security.
Answer
Some of the differences between them are ownership, maturity date, type of return, voting right, and management participation.
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Use the information from IFRS17-10 but assume the shares were purchased to meet a non-trading regulatory requirements. Prepare Fairbanks' journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment.
(Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt
securities investments of Wildcat Company.
1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of \(300,000 at 100 plus accrued interest.
Interest is payable on April 1 and October 1.
2. On April 1, semiannual interest is received
3. On July 1, 9% of bonds of Sampson, Inc. were purchased. These bonds with a par value of \)200,000 were purchased at 100
plus accrued interest. Interest dates are June 1 and December 1.
4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.
5. On October 1, semiannual interest is received.
6. On December 1, semiannual interest is received.
7. On December 31, the fair value of the bonds purchased February 1 and July 1 were 95 and 93, respectively.
Instructions
(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are
available-for-sale securities.
(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).
How does the acid-test ratio differ from the current ratio? How are they similar?
(a) Assuming no Fair Value Adjustment account balance at the beginning of the year, prepare the adjusting entry at the end of the year if Laura Company’s available-for-sale debt securities have a fair value of \(60,000 below cost.
(b) Assume the same information as part (a), except that Laura Company has a debit balance in its Fair Value Adjustment account of \)10,000 at the beginning of the year. Prepare the adjusting entry at year-end.
(Debt Investments) Presented below is information from a bond investment amortization schedule with
related fair values provided. These bonds are classified as available-for-sale.
12/31/17 12/31/18 12/31/19
Amortized cost \(491,150 \)519,442 \(550,000
Fair value 497,000 509,000 550,000
Instructions
(a) Indicate whether the bonds were purchased at a discount or a premium.
(b) Prepare the adjusting entry to record the bonds at fair value on December 31, 2017. The Fair Value Adjustment account
has a debit balance of \)1,000 before adjustment.
(c) Prepare the adjusting entry to record the bonds at fair value on December 31, 2018.
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