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Chapter 12: 11BE (page 610)

Stave Company invests \(10,000,000 in 5% fixed rate corporate bonds on January 1, 2017. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now \)10,600,000. Interest is paid on January 1. Prepare journal entries for Stave Company to (a) record the transactions related to these bonds in 2017, assuming Stave does not elect the fair option; and (b) record the transactions related to these bonds in 2017, assuming that Stave Company elects the fair value option to account for these bond.

Short Answer

Expert verified

Unrealized holding income is $600,000

Interest earned on bonds is $500,000

Step by step solution

01

Step-by-Step Step 1: Definition of bond

A bond is a long-term debt that is issued by acompany to complete its cash requirement. On the bond company provides fixed-rate interest

02

Bond transaction entry when fair value option is not selected

A.

Date

Description

Debit

Credit

January 1, 2017

Debt Investment

$10,000,000

Cash

$10,000,000

Being entry to record the purchase of bonds.

Date

Description

Debit

Credit

January 1, 2018

Cash

$500,000

Interest Revenue

$500,000

Being the entry for bond interest.

.

03

Bond entry when fair value option is selected 

Date

Description

Debit

Credit

January 1, 2017

Debt Investment

$10,000,000

Cash

$10,000,000

Being entry to record the purchase of bonds.

Date

Description

Debit

Credit

January 1, 2018

Cash

$500,000

Interest Revenue

$500,000

Being the entry for bond interest.

.

Date

Description

Debit

Credit

December 31, 2017

Fair Value Adjustment

$600,000

Unrealized Holding Income

$600,000

Being year-end adjustment entry of fair value.

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Most popular questions from this chapter

Question: (Accounting for Franchise, Patents, and Trademark) Information concerning Sandro Corporation’s intangible assets is as follows.

  1. On January 1, 2017, Sandro signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of \(75,000. Of this amount, \)15,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of \(15,000 each, beginning January 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2017, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is \)43,700. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Sandro’s revenue from the franchise for 2017 was \(900,000. Sandro estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.)
  2. Sandro incurred \)65,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2017. Legal fees and other costs associated with registration of the patent totaled \(17,600. Sandro estimates that the useful life of the patent will be 8 years.
  3. A trademark was purchased from Shanghai Company for \)36,000 on July 1, 2014. Expenditures for successful litigation in defense of the trademark totaling $10,200 were paid on July 1, 2017. Sandro estimates that the useful life of the trademark will be 20 years from the date of acquisition.

Instructions

  1. Prepare a schedule showing the intangible assets section of Sandro’s balance sheet at December 31, 2017. Show supporting computations in good form.

Prepare a schedule showing all expenses resulting from the transactions that would appear on Sandro’s income statement for the year ended December 31, 2017. Show supporting computations in good form.

Izzy Inc. purchased a patent for $350,000 which has an estimated useful life of 10 years. Its pattern of use or consumption cannot be reliably determined. Prepare the entry to record the amortization of the patent in its first year of use.

On January 1, 2017, Dagwood Company purchased at par 6%

bonds having a maturity value of $300,000. They are dated January 1, 2017, and mature January 1, 2022, with interest received

on January 1 of each year. 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 the journal entry to record the interest revenue on December 31, 2017.

(c) Prepare the journal entry to record the interest received on January 1, 2018.

Hiram Co. uses the equity method to account for investments in common stock. What accounting should be made for dividends received from these investments subsequent to the date of investment?

Use the information from BE17-1 but assume the bonds are purchased as an available-for-sale security. Prepare Garfield’s journal entries for (a) the purchase of the investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of $75,500.
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