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Chapter 13: Q18E (page 658)

(Impairment of Debt Securities) Hagar Corporation has municipal bonds classified as a held-to-maturity at December 31, 2017. These bonds have a par value of \(800,000, an amortized cost of \)800,000, and a fair value of \(720,000. The

The company believes that impairment accounting is now appropriate for these bonds.

Instructions

(a) Prepare the journal entry to recognize the impairment.

(b) What is the new cost basis of the municipal bonds? Given that the maturity value of the bonds is \)800,000, should Hagar

Do corporations amortize the difference between the carrying amount and the maturity value over the life of the bonds?

(c) On December 31, 2018, the fair value of the municipal bonds is $760,000. Prepare the entry (if any) to record this information

Short Answer

Expert verified

Loss on the impairment debited and debt investment credited by $80,000. New cost basis is $720,000. No entry required for municipal bonds.

Step by step solution

01

Journal entry to recognize the impairment

Date

Particulars

Debit

Credit

December 31, 2017

Loss on impairment ($800,000 - $720,000)

$80,000

Debt Investment

$80,000

(Loss on the impairment of the bonds)

02

New cost basis

The new cost basis of the bonds is $720,000. In this, the cost of bonds is impaired so according to the GAAP it is not right to record bonds on their original value. Hence, the new cost of bonds is $720,00

03

Step 4:Journal entry for fair value of municipal bonds

In this, no entry of fair value is passed because the given security is a held-to-maturity debt investment.

.

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Most popular questions from this chapter

(Equity Method) Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out

40% of net income in dividends each year.

Instructions

Use the information in the following T-account for the investment in Sub to answer the following questions.

Investment in Sub Co.

1,000,000

110,000

44,000

(a) How much was Parent Co.鈥檚 share of Sub Co.鈥檚 net income for the year?

(b) What was Sub Co.鈥檚 total net income for the year?

(c) What were Sub Co.鈥檚 total dividends for the year?

(d) How much was Parent Co.鈥檚 share of Sub Co.鈥檚 dividends for the year?

Garison Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Garison uses two sales promotion techniques鈥攚arranties and premiums鈥攖o attract customers.

Musical instruments and sound equipment are sold with a 1-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon for each dollar spent on recorded music or sheet music. Customers may exchange 200 coupons and \(20 for an MP3 player. Garison pays \)32 for each player and estimates that 60% of the coupons given to customers will be redeemed.

Garison鈥檚 total sales for 2017 were \(7,200,000鈥擻)5,700,000 from musical instruments and sound reproduction equipmentand \(1,500,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled \)94,000 during 2017. A total of 6,500 players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2017.

The balances in the accounts related to warranties and premiums on January 1, 2017, were as shown below.

Inventory of Premiums $ 37,600

Premium Liability 44,800

Warranty Liability 136,000

Instructions

Garison Music Emporium is preparing its financial statements for the year ended December 31, 2017. Determine the amounts that will be shown on the 2017 financial statements for the following.

(a) Warranty Expense. (d) Inventory of Premiums.

(b) Warranty Liability. (e) Premium Liability.

(c) Premium Expense

(Debt and Equity Investments) Cardinal Paz Corp. carries an account in its general ledger called Investments,which contained debits for investment purchases, and no credits, with the following descriptions.

Feb. 1, 2017 Sharapova Company common stock, \(100 par, 200 shares \) 37,400

April 1 U.S. government bonds, 11%, due April 1, 2027, interest payable

April 1 and October 1, 110 bonds of \(1,000 par each 110,000

July 1 McGrath Company 12% bonds, par \)50,000, dated March 1, 2017,

purchased at 104 plus accrued interest, interest payable

annually on March 1, due March 1, 2037, 54,000

(Round all computations to the nearest dollar.)

(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that the debt securities are classified

as available-for-sale.

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2017, using the

straight-line method.

(c) The fair values of the investments on December 31, 2017, were:

Sharapova Company common stock \( 31,800

U.S. government bonds 124,700

McGrath Company bonds 58,600

What entry or entries, if any, would you recommend be made?

(d) The U.S. government bonds were sold on July 1, 2018, for \)119,200 plus accrued interest. Give the proper entry.

How does the acid-test ratio differ from the current ratio? How are they similar?

P17-2 (L01) (Available-for-Sale Debt Securities) On January 1, 2017, Novotna Company purchased \(400,000, 8% bonds of

Aguirre Co. for \)369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and

January 1. The bonds mature on January 1, 2022. Novotna Company uses the effective-interest method to amortize discount

or premiums. On January 1, 2019, Novotna Company sold the bonds for \(370,726 after receiving interest to meet its liquidity

needs.

Instructions

(a) Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available for-

sale.

(b) Prepare the amortization schedule for the bonds.

(c) Prepare the journal entries to record the semiannual interest on July 1, 2017, and December 31, 2017.

(d) If the fair value of Aguirre bonds is \)372,726 on December 31, 2018, prepare the necessary adjusting entry. (Assume the

On December 31, 2017, the fair value adjustment balance was a debit of $3,375.)

(e) Prepare the journal entry to record the sale of the bonds on January 1, 2019.
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