Logout Open In App
Open In App
Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

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)

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

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.

Question: (Debtor/Creditor Entries for Continuation of Troubled Debt with New Effective Interest)

Crocker Corp. owes D. Yaeger Corp. a 10-year, 10% note in the amount of \(330,000 plus \)33,000 of accrued interest. The note is due today, December 31, 2017. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued interest, \(30,000 of the principal, and to extend the maturity date to December 31, 2020. Interest at 10% of revised principal will continue to be due on 12/31 each year.

Assume the following present value factors for 3 periods.

Single sum

0.93543

0.93201

0.92589

0.92521

0.92184

0.91514

Ordinary annuity of 1

2.86989

2.86295

2.85602

2.84913

2.84226

2.82861

Instructions

(a) Compute the new effective-interest rate for Crocker Corp. following restructure. (Hint: Find the interest rate that establishes approximately \)363,000 as the present value of the total future cash flows.)

(b) Prepare a schedule of debt reduction and interest expense for the years 2017 through 2020.

(c) Compute the gain or loss for D. Yaeger Corp. and prepare a schedule of receivable reduction and interest revenue for the years 2017 through 2020.

(d) Prepare all the necessary journal entries on the books of Crocker Corp. for the years 2017, 2018, and 2019.

(e) Prepare all the necessary journal entries on the books of D. Yaeger Corp. for the years 2017, 2018, and 2019.

Question: How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?

(L01) Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.
See all solutions

Recommended explanations on Business Studies Textbooks

Accounting

Read Explanation

Strategic Analysis

Read Explanation

Family Business

Read Explanation

Corporate Finance

Read Explanation

Strategy

Read Explanation

Business Case Studies

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free