Financial Accounting Connect Access Card
Financial Accounting Connect Access Card
5th Edition
ISBN: 9781260159622
Author: J. David Spiceland
Publisher: Mcgraw-Hill
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Question
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Chapter D, Problem 12E

1.

To determine

Complete the first three rows of an amortization table for Corporation R.

1.

Expert Solution
Check Mark

Explanation of Solution

Investment:  It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made debt securities such as bonds.

Complete the first three rows of an amortization for D.

Given, 8% bonds face value of $800,000 purchased.

DateCash receivedInterest revenue

Amortization of

discount

Carrying value
(Face value)×(stated rate)(carrying value)×(market rate)(3)(2)(priorcarryingvalue)(4)
(1)(2)(3)(4)(5)
01/01$ 747,968
30/06$ 32,000$ 33,659$ 1,659749,627
31/1232,00033,7331,733751,360

Table (1)

Note: The interest revenue is calculated semi-annually.

2.

To determine

Record the purchase of the bonds by Corporation R on January 1 and the receipt of the first two semi-annual interest payments on June 30 and December 31.

2.

Expert Solution
Check Mark

Answer to Problem 12E

Record the purchase of the bonds by D on January 1 and the receipt of the first two semi-annual interest payments on June 30 and December 31.

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

January 01Investments747,968
Cash747,968
(To record purchase of bonds)
June 30Cash32,000
Investments (difference amount)1,659
Interest revenue33,659
(To record semi-annual interest revenue)
December 31Cash32,000
Investments (difference amount)1,733
Interest revenue33,733
(To record semi-annual interest revenue)

Table (2)

Note: Interest revenue values are taken from the table (1) of the requirement (1)

Explanation of Solution

Purchase of bonds:

  • Investments are the assets. Purchases of investments increase the assets value. Thus, investments are debited with $747,968.
  • Cash is a current asset. Purchase of bonds decreases the cash balance. Thus, cash is credited with $747,968.

Interest revenue on June 30:

  • Cash is a current asset. Interest revenue increases the cash balance. Thus, cash is debited with $32,000.
  • Investments are the assets. Market rate is more than the stated interest rate. It increases the investments value. Thus, investments are debited with $1,659.
  • Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $33,659.

Interest revenue on December 31:

  • Cash is a current asset. Interest revenue increases the cash balance. Thus, cash is debited with $32,000.
  • Investments are the assets. Market rate is more than the stated interest rate. It increases the investments value. Thus, investments are debited with $1,733.
  • Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $33,733.

3.

To determine

Record the any necessary journal entry for fair value adjustment.

3.

Expert Solution
Check Mark

Answer to Problem 12E

Prepare the journal entries for fair value adjustment of the investments:

DateAccount Title and Explanation

Post.

Ref.

Debit

$

Credit

$

December

 31

Unrealized holding loss – other

comprehensive income (1)

1,360
 Investments1,360

(To record the investment at adjusted

 fair value )

Table (3)

Explanation of Solution

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

To record the adjusted fair value of investments:

  • Unrealized holding loss is a component of the stockholders’ equity (net income). It decreases the net income by $1,360. Thus, it is debited with $1,360
  • Investments are the assets. The value of investments is decreased by $1,360 due to the change in fair value. Thus, investments are credited with $1,360.

Working notes:

Compute the unrealized holding loss – Other Comprehensive income.

Particulars

Amount

$

Investments (book value)751,360
Less: Fair value of the investments750,000

Unrealized holding loss- Other

Comprehensive income

$1,360

(1)

Table (4)

Conclusion

Therefore, Unrealized holding loss- Other Comprehensive income of Corporation R is $1,360.

4.

To determine

Calculate the net income and comprehensive income.

4.

Expert Solution
Check Mark

Explanation of Solution

Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.

Comprehensive income: It’s a measure of company’s total income that includes unrealized gain that has not been received like gain on available for sale securities.

Calculate the net income and comprehensive income:

ParticularsAmount ($)
Sales Revenue$2,600,000
Operating expenses(1,400,000)
Interest revenue ($33,659+$33,733)67,392
Net income1,267,392
Other comprehensive income:
Unrealized holding loss(1,360)
Comprehensive income$1,266,032

Table (5)

Conclusion

Therefore, Corporation R’s net income and comprehensive income are $1,267,392 and 1,266,032.

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