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Chapter 12: QBE17-2 (page 610)

Use the information from BE17-1 but assume the bonds are purchased as an available-for-sale security. Prepare Garfield鈥檚 journal entries for (a) the purchase of the investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of $75,500.

Short Answer

Expert verified
  1. The amount debited to debt investment is $74,086.
  2. The amount of discount amortization is $949.
  3. The unrealized holding loss is $465.

Step by step solution

01

Definition of discount amortization

Discount amortization is the process of reducing the cost of the bond in each period to show the reality of the bond.

02

Journal entry of the purchase of the investment

Date

Description

Debit

Credit

January 1, 2017

Debt Investment

$74,086

Cash

$74,086

Being entry to record the purchase of bonds

03

Journal entry for the receipt of annual interest and discount amortization

Date

Description

Debit

Credit

December 31, 2017

Cash

$7,200

Debt Investment

$949

Interest Revenue

$8,149

Being the entry for bond interest and amortization of the discount

Note:Amortizationamount=Interestactualreceives-ExpectedRateofReturn=11%of$74,086-9%of$80,000=$8,149-$7,200=$949

04

Adjustment entry for the fair value

Date

Description

Debit

Credit

December 31,2017

Fair Value Adjustment

$465

Unrealized Holding Loss

$465

Being year-end adjustment entry of fair value

Note:Unrealizedholdingloss=(Purchaseprice+amortizedamount)-yearendfairvalue=($74,086+$949)-$75,500=$465

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Most popular questions from this chapter

Question: Fields Laboratories holds a valuable patent (No. 758-6002-1A) on a precipitator that prevents certain types of air pollution. Fields does not manufacture or sell the products and processes it develops. Instead, it conducts research and develops products and processes which it patents, and then assigns the patents to manufacturers on a royalty basis. Occasionally it sells a patent. The history of Fields patent number 758-6002-1A is as follows.

Date

Activity

Cost

2008鈥�2009

Research conducted to develop precipitator

$384,000

Jan. 2010

Design and construction of a prototype

87,600

March 2010

Testing of models

42,000

Jan. 2011

Fees paid engineers and lawyers to prepare patent application; patent granted June 30, 2011

59,500

Nov. 2012

Engineering activity necessary to advance the design of the precipitator to the manufacturing stage

81,500

Dec. 2013

Legal fees paid to successfully defend precipitator patent

42,000

April 2014

Research aimed at modifying the design of the patented precipitator

43,000

July 2018

Legal fees paid in unsuccessful patent infringement suit against a competitor

34,000

Fields assumed a useful life of 17 years when it received the initial precipitator patent. On January 1, 2016, it revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the cost is incurred prior to July 1, and no amortization for the year if the cost is incurred after June 30. The company鈥檚 year ends December 31.

Instructions

Compute the carrying value of patent No. 758-6002-1A on each of the following dates:

(a) December 31, 2011.

(b) December 31, 2015.

(c) December 31, 2018.

Question: (Accounting for Goodwill) On July 1, 2017, Brigham Corporation purchased Young Company by paying \(250,000 cash and issuing a \)100,000 note payable to Steve Young. At July 1, 2017, the balance sheet of Young Company was as follows.

Cash
\( 50,000
Accounts payable
\)200,000
Accounts receivable
90,000
Stockholders鈥� equity
235,000
Inventory
 100,000

\(435,000
Land
40,000


Buildings (net)
75,000


Equipment (net)
70,000


Trademarks
10,000



\)435,000






The recorded amounts all approximate current values except for land (fair value of \(60,000), inventory (fair value of \)125,000), and trademarks (fair value of \(15,000).

Instructions

Prepare the July 1 entry for Brigham Corporation to record the purchase.

Prepare the December 31 entry for Brigham Corporation to record amortization of intangibles. The trademark has an estimated useful life of 4 years with a residual value of \)3,000.

Question: (Accounting for Patents) During 2013, Winston Corporation spent \(170,000 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2013, and had a legal life of 20 years and a useful life of 10 years. Legal costs of \)18,000 related to the patent were incurred as of October 1, 2013.

Instructions

(a) Prepare all journal entries required in 2013 and 2014 as a result of the transactions above.

(b) On June 1, 2015, Winston spent $9,480 to successfully prosecute a patent infringement suit. As a result, the estimate of useful life was extended to 12 years from June 1, 2015. Prepare all journal entries required in 2015 and 2016.

(c) In 2017, Winston determined that a competitor鈥檚 product would make the New Age Piano obsolete and the patent worthless by December 31, 2018. Prepare all journal entries required in 2017 and 2018.

(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.

Hiram Co. uses the equity method to account for investments in common stock. What accounting should be made for dividends received from these investments subsequent to the date of investment?
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