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Chapter 13: Q4P (page 658)

(Debt Investments) Presented below is information from a bond investment amortization schedule with

related fair values provided. These bonds are classified as available-for-sale.

12/31/17 12/31/18 12/31/19

Amortized cost \(491,150 \)519,442 \(550,000

Fair value 497,000 509,000 550,000

Instructions

(a) Indicate whether the bonds were purchased at a discount or a premium.

(b) Prepare the adjusting entry to record the bonds at fair value on December 31, 2017. The Fair Value Adjustment account

has a debit balance of \)1,000 before adjustment.

(c) Prepare the adjusting entry to record the bonds at fair value on December 31, 2018.

Short Answer

Expert verified

Fair value adjustment debited and Unrealized holding gain credited with $6,850. unrealized holding loss debited and fair value adjustment credited with $10,442.

Step by step solution

01

Step 1:Purchase of bond

After studying the amortization cost of the bonds, it is concluded that the amortized cost of the bonds increases every. The increase in the amortization cost of every year indicated that the bonds were purchased at a discount.

02

Entry for the fair value adjustment

Date

Particular

Debit

Credit

December 31, 2017

Fair value adjustment

$6,850

Unrealized holding- income

$6,850

(Being entry of the fair value adjustment)

03

Entry for the fair value adjustment

Date

Particular

Debit

Credit

December 31, 2018

Unrealized holding- loss

$10,442

Fair value adjustment

$10,442

(Being entry of the fair value adjustment)

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Most popular questions from this chapter

E13-2 (L01) EXCEL (Accounts and Notes payable) The followingare selected 2017 transactions of Sean Astin Corporation.

Sept.1 Purchased inventory from Encino Company on account for \(50,000. Astin records purchases gross and uses a periodic inventory system.

Oct. 1 Issued a \)50,000, 12-month, 8% note to Encino in payment of account.

Oct. 1Borrowed \(50,000 from the Shore Bank by signing a 12-month,zero- interest-bearing \)54,000 note.

Instructions

(a) Prepare journal entries for the selected transactions above.

(b) prepare adjusting entries at December 31.

(c) Compute the total net liability to be reported on the December 31balancesheetfor:

(1) The interest-bearing note.

(2) The zero-interest-bearing note.

How should a debt callable by the creditor be reported in the debtor鈥檚 financial statements?

You are the independent auditor engaged to audit Millay Corporation鈥檚 December 31, 2017, financial statements. Millay manufactures household appliances. During the course of your audit, you discovered the following contingent liabilities.

  1. Millay began production of a new dishwasher in June 2017 and, by December 31, 2017, sold 120,000 to various retailers for \(500 each. Each dishwasher is under a 1-year warranty. The company estimates that its warranty expense per dishwasher will amount to \)25. At year-end, the company had already paid out \(1,000,000 in warranty expenses. Millay鈥檚 income statement shows warranty expenses of \)1,000,000 for 2017. Millay accounts for warranty costs on the accrual basis.
  2. In response to your attorney鈥檚 letter, Morgan Sondgeroth, Esq., has informed you that Millay has been cited for dumping toxic waste into the Kishwaukee River. Clean-up costs and fines amount to \(2,750,000. Although the case is still being contested, Sondgeroth is certain that Millay will most probably have to pay the fine and clean-up costs. No disclosure of this situation was found in the financial statements.
  3. Millay is the defendant in a patent infringement lawsuit by Megan Drabek over Millay鈥檚 use of a hydraulic compressor in several of its products. Sondgeroth claims that, if the suit goes against Millay, the loss may be as much as \)5,000,000. However, Sondgeroth believes the loss of this suit to be only reasonably possible. Again, no mention of this suit is made in the financial statements.

As presented, these contingencies are not reported in accordance with GAAP, which may create problems in issuing a favorable audit report. You feel the need to note these problems in the work papers.

Instructions

Heading each page with the name of the company, balance sheet date, and a brief description of the problem, write a brief narrative for each of the above issues in the form of a memorandum to be incorporated in the audit work papers. Explain what led to the discovery of each problem, what the problem really is, and what you advised your client to do (along with any appropriate journal entries) in order to bring these contingencies in accordance with GAAP.

Question: At what amount should trading, available-for-sale, and held-to-maturity debt securities be reported on the balance sheet?

Dos Passos Company sells televisions at an average price of \(900 and also offers to each customer a separate 3-year warranty contract for \)90 that requires the company to perform periodic services and to replacedefective parts. During 2017, the company sold 300 televisions and 270 warranty contracts for cash. It estimates the 3-year warrantycosts as \(20 for parts and \)40 for labor, and accounts for warranties separately. Assume sales occurred on December 31,2017, and straight-line recognition of warranty revenues occurs.

Instructions

(a) Record any necessary journal entries in 2017.

(b) What liability relative to these transactions would appear on the December 31, 2017, balance sheet and how would it beclassified?

In 2018, Dos Passos Company incurred actual costs relative to 2017 television warranty sales of \(2,000 for parts and \)4,000 forlabor.

(c) Record any necessary journal entries in 2018 relative to 2017 television warranties.

(d) What amounts relative to the 2017 television warranties would appear on the December 31, 2018, balance sheet andhow would they be classified?
See all solutions

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