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Chapter 14: Q1P (page 718)

Question: (Debt Securities) Presented below is an amortization schedule related to Spangler Company’s 5-year, \(100,000

bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for \)108,660.

Cash Interest Bond Premium Carrying Amount

Date Received Revenue Amortization of Bonds

12/31/15 \(108,660

12/31/16 \)7,000 \(5,433 \)1,567 107,093

12/31/17 7,000 5,354 1,646 105,447

12/31/18 7,000 5,272 1,728 103,719

12/31/19 7,000 5,186 1,814 101,905

12/31/20 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/16 12/31/17 12/31/18 12/31/19 12/31/20

Amortized cost \(107,093 \)105,447 \(103,719 \)101,905 $100,000

Fair value 106,500 107,500 105,650 103,000 100,000

Instructions

(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified

as held-to-maturity securities.

(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.

(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.

(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-

sale.

(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.

(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.

Short Answer

Expert verified

Answer:

Unrealized holding loss for 2016 is $593 and $719 for 2018. Debt investment debited and cash credited by $108,660. Cash debited by $7,000, interest revenue credited by $5,433 and debt investment credited by $1,567.

Step by step solution

01

Entry for the purchase of held-to-maturity securities

Date

Particulars

Debit

Credit

December 31, 2015

Debt Investment

$108,660

Cash

$108,660

(Being entry for the purchase of bond)

02

Entry related to interest revenue for December 31, 2016

Date

Particulars

Debit

Credit

December 31, 2016

Cash

$7,000

Interest Revenue

$5,433

Debt Investment

$1,567

(Being entry of interest revenue)

03

Entry related to interest revenue for December 31, 2018

Date

Particulars

Debit

Credit

December 31, 2018

Cash

$7,000

Interest Revenue

$5,272

Debt Investment

$1,728

(Being entry of interest revenue)

04

Entry related to purchasing of available-for-sale securities

Date

Particulars

Debit

Credit

December 31, 2015

Debt Investment

$108,660

Cash

$108,660

(Being entry for the purchase of bond)

05

Entry related to interest revenue and fair value adjustment for December 31, 2016 

Date

Particulars

Debit

Credit

December 31, 2016

Cash

$7,000

Interest Revenue

$5,433

Debt Investment

$1,567

(Being entry of interest revenue)

December 31, 2016

Unrealized holding Gain or loss- loss

$593

Fair value adjustment

$593

(Being entry for fair value adjustment)

06

Entry related to interest revenue and fair value adjustment for December 31, 2018

Date

Particulars

Debit

Credit

December 31, 2018

Cash

$7,000

Interest Revenue

$5,272

Debt Investment

$1,728

(Being entry of interest revenue)

December 31, 2018

Unrealized holding Gain or loss- loss

$719

Fair value adjustment

$719

(Being entry for fair value adjustment)

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Most popular questions from this chapter

Question: What is the required method of amortizing discount and premium on bonds payable? Explain the procedures.

Strickland Company owes \(200,000 plus \)18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2017, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2017, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of \(390,000, accumulated depreciation of \)221,000, and a fair value of \(180,000.

Instructions

  1. Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.
  2. How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2017 income statement?
  3. Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock (\)10 par) which has a fair value of $180,000 in full settlement of the loan obligation. If Moran State Bank treats Strickland’s stock as a trading investment, prepare the entries to record the transaction for both parties.

The following article appeared in the Wall Street Journal.

Bond Markets

Giant Commonwealth Edison Issue Hits Resale Market With \(70 Million Left Over

New york—Commonwealth Edison Co.’s slow-selling new 91 /4% bonds were tossed onto the resale market at a reduced price with about \)70 million still available from the \(200 million offered Thursday, dealers said.

The Chicago utility’s bonds, rated double-A by Moody’s and double-A-minus by Standard & Poor’s, originally had been priced at 99.803, to yield 9.3% in 5 years. They were marked down yesterday the equivalent of about \)5.50 for each $1,000 face amount, to about 99.25, where their yield jumped to 9.45%.

Instructions

  1. How will the development above affect the accounting for Commonwealth Edison’s bond issue?
  2. Provide several possible explanations for the markdown and the slow sale of Commonwealth Edison’s bonds.

Karen Austin Inc. has issued three types of debt on January 1, 2017, the start of the company’s fiscal year.

  1. \(10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%.
  2. \)25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year.
  3. $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.

Instructions

Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue.

Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes. Any changes in fair value are due to changes in market rates, not credit risk.

Carrying Value

Fair Value

December 31, 2017

\(54,000

\)54,000

December 31, 2018

44,000

42,500

December 31, 2019

36,000

38,000

Instructions

(a) Prepare the journal entry at December 31 (Fallen’s year-end) for 2017, 2018, and 2019, to record the fair value option for these notes.

(b) At what amount will the note be reported on Fallen’s 2018 balance sheet?

(c) What is the effect of recording the fair value option on these notes on Fallen’s 2019 income?

(d) Assuming that general market interest rates have been stable over the period, does the fair value data for the notes indicate that Fallen’s creditworthiness has improved or declined in 2019? Explain.
See all solutions

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