Financial Accounting Connect Access Card
Financial Accounting Connect Access Card
5th Edition
ISBN: 9781260159622
Author: J. David Spiceland
Publisher: Mcgraw-Hill
bartleby

Videos

Question
Book Icon
Chapter D, Problem 4PB

1.

To determine

Record the Company TS’s investment as on January 01.

1.

Expert Solution
Check Mark

Explanation of Solution

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Record the Company TS’s investment on January 1.

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

January 01Investments124,728
Cash124,728
(To record purchase of bonds)

Table (1)

Purchase of bonds:

  • Investments are the assets. Purchases of investments increase the assets value. Thus, investments are debited with $124,728.
  • Cash is a current asset. Purchase of bonds decreases the cash balance. Thus, cash is credited with $124,728.

2.

To determine

Record the interest revenue earned by Company TS for the first six months ended June 30.

2.

Expert Solution
Check Mark

Explanation of Solution

Record the interest revenue earned by Company TS for the first six months ended June 30.

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

June 30Cash (1)4,550
Investments (difference amount)439
Interest revenue (2)4,989
(To record semi-annual interest revenue)

Table (2)

Interest revenue on June 30:

  • Cash is a current asset. Interest revenue increases the cash balance. Thus, cash is debited with $4,550.
  • Investments are the assets. Market rate is more than stated interest rate. It increases the investments value. Thus, investments are debited with $439.
  • Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $4,989.

Working Notes:

Calculate the cash received:

Cash received=Face value of bonds×Rate×6months12months=$130,000×7%×612=$4,550 (1)

Therefore, cash received is $4,550.

Calculate the interest revenue for the first six months:

Interest revenue=Carrying value of bonds×Market Rate×6months12months=$124,728×8%×612=$4,989 (2)

Therefore, the interest revenue for the first six months is $4,989.

3.

To determine

Record the interest revenue earned by Company TS for the next six months ended December 31.

3.

Expert Solution
Check Mark

Explanation of Solution

Record the interest revenue earned by Company TS for the next six months ended December 31:

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

December 31Cash (3)4,550
Investments (difference amount)457
Interest revenue (4)5,007
(To record semi-annual interest revenue)

Table (3)

Interest revenue on December 31:

  • Cash is a current asset. Interest revenue increases the cash balance. Thus, cash is debited with $4,550.
  • Investments are the assets. Market rate is more than stated interest rate. It increases the investments value. Thus, investments are debited with $457.
  • Interest revenue is a component of the stockholders’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $5,007.

Working Notes:

Calculate the cash received:

Cash received=Face value of bonds×Rate×6months12months=$130,000×7%×612=$4,550 (3)

Therefore, cash received is $4,550.

Calculate the interest revenue for the next six months:

Interest revenue=Carrying value of bonds×Market Rate×6months12months=($124,728+$439)×8%×612=$5,007 (4)

Therefore, the interest revenue for the next six months is $5,007.

4.

To determine

Compute the amount at which Company TS will report its investment in the December 31 balance sheet and the reason behind it.

4.

Expert Solution
Check Mark

Explanation of Solution

Company TS will report its investment at its amortized cost (book value) of $125,624 ($124,728+$439+$457) in its December 31 balance sheet.

As held-to-maturity securities will not be sold until its maturity, it is irrelevant that whether there is an increase or decrease in the fair value of the securities between the time of acquiring a debt security, and the day of its maturity. Hence, for this reason, Company TS reports its held-to-maturity securities at an amortized cost in its balance sheet rather than recording them at a fair value.

5.

To determine

Record any necessary fair value adjustment, if the investments are not intended to hold the debt securities until maturity but also has no intention to sell them any time soon.

5.

Expert Solution
Check Mark

Explanation of Solution

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Record any necessary fair value adjustment:

DateAccount Title and Explanation

Post

Ref.

Debit

$

Credit

$

December 31Investments7,180
 Unrealized holding gain – net income (5)7,180
(To record the investment at  adjusted fair value )

Table (4)

Explanation for the above journal entry:

  • Investments are the assets. There is an Increase in the investments value by $7,180 due to fair value. Thus, investments are debited with $7,180.
  • Unrealized holding gain is a component of the stockholders’ equity (net income). It increases the net income by $7,180. Thus, it is credited with $7,180.

Working notes:

Compute the unrealized holding gain – net income.

Particulars

Amount

$

Investments (book value)152,820
Less: fair value of the investments160,000
Unrealized holding gain-net income(7,180)

(5)

Table (5)

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education
Financial Accounting - Long-term Liabilities - Bonds; Author: Finance & Accounting Videos by Prof Coram;https://www.youtube.com/watch?v=_1fwsJIGMos;License: Standard Youtube License