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Chapter 13: Q2Q (page 658)
Question: What purpose does the variety in bond features (types and characteristics) serve?
Answer:
Variety in bond features helps investors reduce their risk and generate a high yield.
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CA13-7 ETHICS (Warranties) The Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental fee of \(600 per month plus 5% of yearly profits over \)500,000. Matt Rich, the owner of the store, directs his accountant, Ron Hamilton, to increase the estimate of bad debt expense and warranty costs in order to keep profits at $475,000.
Instructions
Answer the following questions.
(a) Should Hamilton follow his boss鈥檚 directive?
(b) Who is harmed if the estimates are increased?
(c) Is Matt Rich鈥檚 directive ethical?
(Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt
securities investments of Wildcat Company.
1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of \(300,000 at 100 plus accrued interest.
Interest is payable on April 1 and October 1.
2. On April 1, semiannual interest is received
3. On July 1, 9% of bonds of Sampson, Inc. were purchased. These bonds with a par value of \)200,000 were purchased at 100
plus accrued interest. Interest dates are June 1 and December 1.
4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.
5. On October 1, semiannual interest is received.
6. On December 1, semiannual interest is received.
7. On December 31, the fair value of the bonds purchased February 1 and July 1 were 95 and 93, respectively.
Instructions
(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are
available-for-sale securities.
(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).
What is an onerous contract? Give two examples of an onerous contract.
(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.
Question: On February 1, 2018, one of the huge storage tanks of Viking Manufacturing Company exploded. Windows in houses and other buildings within a one-mile radius of the explosion were severely damaged, and a number of people were injured. As of February 15, 2018 (When the December 31, 2017, financial statements were completed and sent to the publisher for printing and public distribution), no suits had been filed or claims asserted against the company as a consequence of the explosion. The company fully anticipates that suits will be filed and claims asserted for injuries and damages. Because the casualty was uninsured and the company is considered at fault, Viking Manufacturing will have to cover the damages from its own resources.InstructionsDiscuss fully the accounting treatment and disclosures that should be accorded the casualty and related contingent losses in the financial statements dated December 31, 2017.
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