Chapter 13: Q2Q (page 658)
Question: What purpose does the variety in bond features (types and characteristics) serve?
Answer:
Variety in bond features helps investors reduce their risk and generate a high yield.
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Which types of investments are valued at amortized cost? Explain the rationale for this accounting.
(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).
Question: In accounting for short-term debt expected to be refinanced to long-term debt:
Carow Corporation purchased, as a held-for-collection investment, \(60,000 of the 8%, 5-year bonds of Harrison, Inc.
for \)65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow’s journal entries for (a) the purchase
of the investment, and (b) the receipt of semiannual interest and premium amortization
If the bonds in Question 8 are classified as available-for-sale, and they have a fair value at December 31, 2017, of $3,604,000, prepare the journal entry (if any) at December 31, 2017, to record this transaction.
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