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Chapter 10: 1RQ (page 566)
What is a debt security?
Security reflecting the terms and conditions of the debt is known as debt security.
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Wild Adventure conducts tours of wildlife reserves around the world. The company recently purchased a lodge in Adelaide, Australia, securing a 4% mortgage from First Bank. In addition to monthly payments, Wild Adventure must provide annual reports to the bank showing that the company has a current ratio of 1.2 or better. After reviewing the annual reports, the CEO, N. O. Scrooge, approached Carl Hauptfleisch, the CFO, and stated, 鈥淲e鈥檝e decided we are going to move all our long-term debt investments into our brokerage account so we can sell them soon. Carl, go ahead and make the adjusting entries as of the current year-end.鈥� Carl made the adjustments even though he doesn鈥檛 think the company will actually go ahead with the planned sale of the long-term debt investments. The subsequent year, the economy turned, and the company鈥檚 travel revenues dropped more than 60%. Wild Adventure eventually defaulted on the First Bank loan.
Requirements
What type of information in the financial reports would have helped the bank detect this reclassification?
Question: P10-25 Accounting for debt and equity investments
This problem continues the Canyon Canoe Company situation from Chapter 9. Amber and Zack Wilson are pleased with the growth of their business and have decided to invest its temporary excess cash in a brokerage account. The company had the following securities transactions in 2019.
Jul. 1 Purchased 8,000 shares in Adobe Outdoor Adventure Company for \(3 per share. Canyon Canoe does not have significant influence over Adobe.
7 Purchased 35% of the stock of Bison Backpacks consisting of 43,750 shares of stock (out of a total of 125,000 shares) for \)5 per share. Canyon Canoe does have significant influence over Bison.
10 Purchased a bond from Camelot Canoes with a face value of \(80,000. Canyon Canoe intends to hold the bond to maturity. The bond pays interest semiannually on June 30 and December 31.
Sep. 30 Received dividends of \)0.15 per share from Adobe.
Nov. 1 Received dividends of \(0.30 per share from Bison.
Dec. 31 Received an interest payment of \)3,200 from Camelot Canoes.
31 Bison Backpacks reported net income of \(30,000 for the year.
31 Adjusted the Adobe stock for a market value of \)2.98 per share.
Requirements
Determine the effect on Canyon Canoe Company鈥檚 net income for the year for each of the three investments.
Accounting for debt investments
Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.
Requirements
How much cash interest will Advance receive each year from FermaCo?
In 150 words or fewer, explain the difference between trading debt investments and available-for-sale debt investments.
Accounting for debt investments
Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.
Requirements
1. Journalize any required 2018 entries for the bond investment.
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