Financial accounting
Financial accounting
3rd Edition
ISBN: 9780077506902
Author: David J Spieceland Wayne Thomas Don Herrmann
Publisher: Mcgraw-Hill
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Chapter D, Problem D.4BP

1.

To determine

To Record: The Company TS’s investment on January 1.

1.

Expert Solution
Check Mark

Explanation of Solution

Record the Company TS’s investment on January 1.

Investment:

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

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

January 01Investments  124,728 
Cash   124,728
 (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

To 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  4,550 
Investments (difference amount) 439 
Interest revenue  4,989
 (To record semi-annual interest revenue)   

Table (2)

Working Notes:

Calculate the cash received.

Cash received=Face value of bonds×Rate×6months12months=$130,000×7%×612=$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

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 less then stated interest rate. It decreases the investments value. Thus, investments are credited with $439.
  • Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $4,989.

3.

To determine

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

3.

Expert Solution
Check Mark

Explanation of Solution

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

December 31

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

Table (1)

Working Notes:

Calculate the cash received.

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

Calculate the interest revenue for the first six months.

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

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 less then stated interest rate. It decreases the investments value. Thus, investments are credited with $457.
  • Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $5,007.

4.

To determine

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, it is 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.

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