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Chapter 14: 5IFRS (page 718)

Lady Gaga Co. recently made an investment in the bonds issued by Chili Peppers Inc. Lady Gaga’s business model for this investment is to profit from trading in response to changes in market interest rates. How should this investment be classified by Lady Gaga? Explain.

Short Answer

Expert verified

Given investment is classified as a trading security.

Step by step solution

01

Definition of trading securities

Trading securities are held for less than one year and sold when the price goes up.

02

Classification of investment

The given investment is classified as trading because the primary purpose is to earn profit by selling this investment. Hence, this investment is classified as Trading. Also, the valuation of this investment is done based on fair value.

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Most popular questions from this chapter

(Issuance of Bonds between Interest Dates, Straight-Line, Redemption) Presented below are selected transactions on the books of Simonson Corporation.

May 1, 2017 Bonds payable with a par value of \(900,000, which are dated January 1, 2017, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2027. (Use interest expense account for accrued interest.)

Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the amortization of the proper amount of premium. (Use straight-line amortization.)

Jan. 1, 2018 Interest on the bonds is paid.

April 1 Bonds with par value of \)360,000 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.)

Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized.

Instructions

(Round to two decimal places.)

Prepare journal entries for the transactions above.

Vargo Corp. owes \(270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2019, reduce the principal to \)220,000, and reduce the interest rate to 5%, payable annually on December 31.

Instructions

  1. Prepare the journal entries on Vargo’s books on December 31, 2017, 2018, 2019.
  2. Prepare the journal entries on First Trust’s books on December 31, 2017, 2018, 2019.

Question: The following information is taken from the 2017 annual report of Bugant, Inc. Bugant’s fiscal year ends December 31 of each year. Bugant’s December 31, 2017, balance sheet is as follows.

Bugant, Inc.

Balance Sheet

December 31, 2017

Assets

Cash \( 450

Inventory 1,800

Total current assets 2,250

Plant and equipment 2,000

Accumulated depreciation (160)

Total assets \)4,090

Liabilities

Bonds payable (net of discount) \(1,426

Stockholders’ equity

Common stock 1,500

Retained earnings 1,164

Total liabilities and stockholders’ equity \)4,090

Note X: Long Term Debt:

On January 1, 2016, Bugant issued bonds with face value of \(1,500 and a coupon rate equal to 10%. The bonds were issued to yield 12% and mature on January 1, 2021.

Additional information concerning 2018 is as follows.

  1. Sales were \)3,500, all for cash.
  2. Purchases were \(2,000, all paid in cash.
  3. Salaries were \)700, all paid in cash.
  4. Property, plant, and equipment was originally purchased for \(2,000 and is depreciated straight-line over a 25-year life with no salvage value.
  5. Ending inventory was \)1,900.
  6. Cash dividends of \(100 were declared and paid by Bugant.
  7. Ignore taxes.
  8. The market rate of interest on bonds of similar risk was 12% during all of 2018.
  9. Interest on the bonds is paid semiannually each June 30 and December 31.

Accounting

Prepare a balance sheet for Bugant, Inc. at December 31, 2018, and an income statement for the year ending December 31, 2018. Assume semiannual compounding of the bond interest.

Analysis

Use common ratios for analysis of long-term debt to assess Bugant’s long-run solvency. Has Bugant’s solvency changed much from 2017 to 2018? Bugant’s net income in 2017 was \)550 and interest expense was $169.

Principles

The FASB and the IASB allow companies the option of recognizing in their financial statements the fair values of their long-term debt. That is, companies have the option to change the balance sheet value of their long-term debt to the debt’s fair value and report the change in balance sheet value as a gain or loss in income. In terms of the qualitative characteristics of accounting information (Chapter 2), briefly describe the potential trade-off(s) involved in reporting long-term debt at its fair value.

What are some forms of off-balance-sheet financing?

All of the following are differences between IFRS and GAAP in accounting for liabilities except:

a) When a bond is issued at a discount, GAAP records the discount in a separate contra liability account. IFRS records the bond net of the discount.

b) Under IFRS, bond issuance costs reduce the carrying value of the debt. Under GAAP, these costs are recorded as an asset and amortized to expense over the terms of the bond.

c) GAAP, but not IFRS, uses the term “troubled-debt restructurings.”

d) GAAP, but not IFRS, uses the term “provisions” for contingent liabilities which are accrued.
See all solutions

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