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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

Calaf鈥檚 Drillers erects and places into service an off-shore oil platform on January 1, 2018, at a cost of \(10,000,000. Calaf is legally required to dismantle and remove the platform at the end of its useful life in 10 years. Calaf estimates it will cost \)1,000,000 to dismantle and remove the platform at the end of its useful life in 10 years. (The fair value at January 1,2018, of the dismantle and removal costs is $450,000.) Prepare the entry to record the asset retirement obligation

Presented below is the December 31 trial balance of New York Boutique.

NEW YORK BOUTIQUE

TRIAL BALANCE

DECEMBER 31


Debit

Credit

Cash

\( 18,500

Accounts Receivable

32,000

Allowance for Doubtful Accounts

\) 700

Inventory, December 31

80,000

Prepaid Insurance

5,100

Equipment

84,000

Accumulated Depreciation鈥擡quipment

35,000

Notes Payable

28,000

Common Stock

80,600

Retained Earnings

10,000

Sales Revenue

600,000

Cost of Goods Sold

408,000

Salaries and Wages Expense (sales)

50,000

Advertising Expense

6,700

Salaries and Wages Expense (administrative)

65,000

Supplies Expense

5,000

\(754,300

\)754,300

Instructions

a. Construct T-accounts and enter the balances shown.

b. Prepare adjusting journal entries for the following and post to the T-accounts. (Omit explanations.) Open additional T-accounts as necessary. (The books are closed yearly on December 31.)

  1. Bad debt expense is estimated to be \(1,400.
  2. Equipment is depreciated based on a 7-year life (no salvage value).
  3. Insurance expired during the year \)2,550.
  4. Interest accrued on notes payable \(3,360.
  5. Sales salaries and wages earned but not paid \)2,400.
  6. Advertising paid in advance \(700.
  7. Office supplies on hand \)1,500, charged to Supplies Expense when purchased. c.Prepare closing entries and post to the accounts.

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.

Grant Company has had a record-breaking year in terms of growth in sales and profitability. However, market research indicates that it will experience operating losses in two of its major businesses next year. The controller has proposed that the company record a provision for these future losses this year, since it can afford to take the charge and still show good results. Advise the controller on the appropriateness of this charge

How are current liabilities related by definition to current assets? How are current liabilities related to a company鈥檚 operating cycle?
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