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Chapter 12: 3E (page 610)

On January 1, 2017, Hi and Lois Company purchased 12% bonds having a maturity value of \(300,000 for \)322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Hi and Lois Company uses the effective interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

Instructions

(a) Prepare the journal entry at the date of the bond purchase.

(b) Prepare a bond amortization schedule.

(c) Prepare the journal entry to record the interest revenue and the amortization at December 31, 2017.

(d) Prepare the journal entry to record the interestand the amortization at December 31, 2018.

Short Answer

Expert verified

The debt investment Account was debited with $322,744.44, and the interest revenue account was credited with $32,274.44 and $31,901.89.

Step by step solution

01

Step 1

Held-to-Maturity securities are those securities that are kept held till the date of maturity.

02

Entry of bond purchase

Date

Description

Debit

Credit

January 1, 2017

Debt Investment

$322,744.44

Cash

$322,744.44

Being entry to record the purchase of bonds.

03

Bond amortization schedule

Date

Cash Received

Interest Revenue

Discounted Amortized

Carrying Amount of Bond

January 1, 2017

$322,744.44

January 1,2018

36,000

$32,274.44

$3,725.56

$319,018.88

January 1,2019

36,000

$31,901.89

$4098.11

$314,920.77

January 1,2020

36,000

$31,492.07

$4,507.93

$310,410.84

January 1,2021

36,000

$31,041.28

$4,958.72

$305,452.12

January 1,2022

36,000

$30,545.21

$5,454.79

$300,000

04

Entry of interest revenue

Date

Description

Debit

Credit

December 31, 2017

Cash

$36,000

Held-to-maturity Securities

$3,725.56

Interest Revenue

$32,274.44

Being the entry for bond interest.

05

Entry of interest revenue

Date

Description

Debit

Credit

December 31, 2018

Cash

$36,000

Held-to-maturity Securities

$4,098.11

Interest Revenue

$31,901.89

Being the entry for bond interest.

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Most popular questions from this chapter

Question: (Accounting for R&D Costs) More Company incurred the following costs during the current year in connection with its research and development activities.

Cost of equipment acquired that will have alternative uses in future R&D projects over the next 5 years (uses straight-line depreciation)

$280,000

Materials consumed in R&D projects

59,000

Consulting fees paid to outsiders for R&D projects

100,000

Personnel costs of persons involved in R&D projects

128,000

Indirect costs reasonably allocable to R&D projects

50,000

Materials purchased for future R&D projects

34,000

Instructions

Compute the amount to be reported as research and development expense by More on its current year income statement. Assume equipment is purchased at the beginning of the year.

The following is a list of items that could be included in the intangible assets section of the balance sheet.

1. Investment in a subsidiary company.

2. Timberland.

3. Cost of engineering activity required to advance the design of a product to the manufacturing stage.

4. Lease prepayment (6 months鈥� rent paid in advance).

5. Cost of equipment obtained.

6. Cost of searching for applications of new research findings.

7. Costs incurred in the formation of a corporation.

8. Operating losses incurred in the start-up of a business.

9. Training costs incurred in start-up of new operation.

10. Purchase cost of a franchise.

11. Goodwill generated internally.

12. Cost of testing in search for product alternatives.

13. Goodwill acquired in the purchase of a business.

14. Cost of developing a patent.

15. Cost of purchasing a patent from an inventor.

16. Legal costs incurred in securing a patent.

17. Unrecovered costs of a successful legal suit to protect the patent.

18. Cost of conceptual formulation of possible product alternatives.

19. Cost of purchasing a copyright.

20. Research and development costs.

21. Long-term receivables.

22. Cost of developing a trademark.

23. Cost of purchasing a trademark.

Instructions:

(a) Indicate which items on the list above would generally be reported as intangible assets in the balance sheet.

(b) Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements.

(Comprehensive Intangible Assets) Montana Matt鈥檚 Golf Inc. was formed on July 1, 2016, when Matt Magilke purchased the Old Master Golf Company. Old Master provides video golf instruction at kiosks in shopping malls. Magik plans to integrate the instructional business into his golf equipment and accessory stores. Magik paid \(770,000 cash for Old Master. At the time, Old Master鈥檚 balance sheet reported assets of \)650,000 and liabilities of \(200,000 (thus owners鈥� equity was \)450,000). The fair value of Old Master鈥檚 assets is estimated to be \(800,000. Included in the assets is the Old Master trade name with a fair value of \)10,000 and copyright on some instructional books with a fair value of \(24,000. The trade name has a remaining life of 5 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 40 years.

Instructions

  1. Prepare the intangible assets section of Montana Matt鈥檚 Golf Inc. on December 31, 2016. How much amortization expense is included in Montana Matt鈥檚 income for the year ended December 31, 2016? Show all supporting computations.
  2. Prepare the journal entry to record amortization expenses for 2017. Prepare the intangible assets section of Montana Matt鈥檚 Golf Inc. on December 31, 2017. (No impairments are required to be recorded in 2017.)
  3. At the end of 2018, Magilke is evaluating the results of the instructional business. Due to fierce competition from online and television (e.g., the Golf Channel), the Old Master reporting unit has been losing money. Its book value is now \)500,000. The fair value of the Old Master reporting unit is \(420,000. The implied value of goodwill is \)90,000. Magik has collected the following information related to the company鈥檚 intangible assets.

Intangible Asset

Expected Cash Flows (undiscounted)

Fair value

Trade names

\( 9,000

\) 3,000

Copyrights

30,000

25,000

Prepare the journal entries required, if any, to record impairments on Montana Matt鈥檚 intangible assets. (Assume that any amortization for 2018 has been recorded.) Show supporting computations.

Garfield Company purchased, on January 1, 2017, as a held-to-maturity investment, \(80,000 of the 9%, 5-year bonds of Chester Corporation for \)74,086, which provides an 11% return. Prepare Garfield鈥檚 journal entries for (a) the purchase of the investment, and (b) the receipt of annual interest and discount amortization. Assume effective-interest amortization is used.

(Investment Classifications)For the following investments, identify whether they are:

1. Trading debt securities.

2. Available-for-sale debt securities.

3. Held-to-maturity debt securities.

4. None of the above.

Each case is independent of the other.

(a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases,

which is expected next month, it will be sold.

(b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30%

of its outstanding stock.

(c) Bonds were purchased in December of this year. The bonds are expected to be sold in January of next year.

(d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money

has been tight recently and they may need to be sold.

(e) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.

(f) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project

planned 10 years from now.
See all solutions

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