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Chapter 14: Q1P (page 718)

Question: (Debt Securities) Presented below is an amortization schedule related to Spangler Company鈥檚 5-year, \(100,000

bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for \)108,660.

Cash Interest Bond Premium Carrying Amount

Date Received Revenue Amortization of Bonds

12/31/15 \(108,660

12/31/16 \)7,000 \(5,433 \)1,567 107,093

12/31/17 7,000 5,354 1,646 105,447

12/31/18 7,000 5,272 1,728 103,719

12/31/19 7,000 5,186 1,814 101,905

12/31/20 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/16 12/31/17 12/31/18 12/31/19 12/31/20

Amortized cost \(107,093 \)105,447 \(103,719 \)101,905 $100,000

Fair value 106,500 107,500 105,650 103,000 100,000

Instructions

(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified

as held-to-maturity securities.

(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.

(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.

(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-

sale.

(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.

(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.

Short Answer

Expert verified

Answer:

Unrealized holding loss for 2016 is $593 and $719 for 2018. Debt investment debited and cash credited by $108,660. Cash debited by $7,000, interest revenue credited by $5,433 and debt investment credited by $1,567.

Step by step solution

01

Entry for the purchase of held-to-maturity securities

Date

Particulars

Debit

Credit

December 31, 2015

Debt Investment

$108,660

Cash

$108,660

(Being entry for the purchase of bond)

02

Entry related to interest revenue for December 31, 2016

Date

Particulars

Debit

Credit

December 31, 2016

Cash

$7,000

Interest Revenue

$5,433

Debt Investment

$1,567

(Being entry of interest revenue)

03

Entry related to interest revenue for December 31, 2018

Date

Particulars

Debit

Credit

December 31, 2018

Cash

$7,000

Interest Revenue

$5,272

Debt Investment

$1,728

(Being entry of interest revenue)

04

Entry related to purchasing of available-for-sale securities

Date

Particulars

Debit

Credit

December 31, 2015

Debt Investment

$108,660

Cash

$108,660

(Being entry for the purchase of bond)

05

Entry related to interest revenue and fair value adjustment for December 31, 2016 

Date

Particulars

Debit

Credit

December 31, 2016

Cash

$7,000

Interest Revenue

$5,433

Debt Investment

$1,567

(Being entry of interest revenue)

December 31, 2016

Unrealized holding Gain or loss- loss

$593

Fair value adjustment

$593

(Being entry for fair value adjustment)

06

Entry related to interest revenue and fair value adjustment for December 31, 2018

Date

Particulars

Debit

Credit

December 31, 2018

Cash

$7,000

Interest Revenue

$5,272

Debt Investment

$1,728

(Being entry of interest revenue)

December 31, 2018

Unrealized holding Gain or loss- loss

$719

Fair value adjustment

$719

(Being entry for fair value adjustment)

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Most popular questions from this chapter

Pierre Company has a 12% note payable with a carrying value of \(20,000. Pierre applies the fair value option to this note. Given an increase in market interest rates, the fair value of the note is \)22,600. Prepare the entry to record the fair value option for this note, assuming

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(b) the change is due to a change in credit risk.

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On April 1, 2017, Seminole Company sold 15,000 of its 11%, 15-year, \(1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2018, Seminole took advantage of favorable prices of its stock to extinguish 6,000 of the bonds by issuing 200,000 shares of its \)10 par value common stock. At this time, the accrued interest was paid in cash. The company鈥檚 stock was selling for $31 per share on March 1, 2018.

Instructions

Prepare the journal entries needed on the books of Seminole Company to record the following.

(a) April 1, 2017: issuance of the bonds.

(b) October 1, 2017: payment of semi-annual interest.

(c) December 31, 2017: accrual of interest expense.

(d) March 1, 2018: extinguishment of 6,000 bonds. (No reversing entries made.)

Gottlieb Co. owes \(199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some land and cancel the entire debt. The property has a book value of \)90,000 and a fair value of $140,000.

Instructions

  1. Prepare the journal entry on Gottlieb鈥檚 books for debt restructure.
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