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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

EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its

investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common

stock which cost \(58,500, (2) 10,000 shares of Munter Ltd. common stock which cost \)580,000, and (3) 6,000 shares of King Company

preferred stock which cost \(255,000. The Fair Value Adjustment account shows a credit of \)10,100 at the end of 2017.

In 2018, Parnevik completed the following securities transactions.

1. On January 15, sold 3,000 shares of Anderson鈥檚 common stock at \(22 per share less fees of \)2,150.

2. On April 17, purchased 1,000 shares of Castle鈥檚 common stock at \(33.50 per share plus fees of \)1,980.

On December 31, 2018, the market prices per share of these securities were Munter \(61, King \)40, and Castle $29. In addition, the

accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik

will not actively trade these securities because the top management intends to hold them for more than one year.

Instructions

(a) Prepare the entry for the security sale on January 15, 2018.

(b) Prepare the journal entry to record the security purchase on April 17, 2018.

(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.

(d) How should the unrealized gains or losses be reported on Parnevik鈥檚 income statement and balance sheet?

BE13-2 (L01) Upland Company borrowed \(40,000 on November 1, 2017, by signing a \)40,000, 9%, 3-month note. Prepare Upland鈥檚 November 1, 2017, entry; the December 31, 2017, annual adjusting entry; and the February 1, 2018, entry.

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

Question:Adriana Co., with annual net sales of $5 million, maintains a markup of 25% based on cost. Adriana鈥檚 expenses average 15% of net sales. What is Adriana鈥檚 gross profit and net profit in dollars?

Leon Wight, a newly hired loan analyst, is examining the current liabilities of a corporate loan applicant. He observes that unearned revenues have declined in the current year compared to the prior year. Is this a positive indicator about the client鈥檚 liquidity? Explain.
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