Question

In: Accounting

a. On January 1, 20X1, Stella Entity purchases bonds issued by Gragas Entity for $900,000. Stella...

a. On January 1, 20X1, Stella Entity purchases bonds issued by Gragas Entity for $900,000. Stella Entity will receive an annual coupon payment of $75,000 and an additional $1,000,000 when the bond expires. On January 1, 20X3, Stella Entity is short on cash and needs to purchase new equipment to replace equipment that was destroyed in a factory fire. Stella Entity agrees with Cash Entity to sell all of its rights to future payments on the bond for $875,000. The value of the bond on the statement of financial position on January 1, 20X3 is $934,320. Provide the journal entries to reflect the purchase and eventual derecognition of the bonds.

b. On April 1, 20X1, Peanut Company purchased a call option for 10,000 shares of Sax Company that expires on October 1, 20X1. On the date that Peanut Company purchases the option, the strike price is $25. Additionally, the option is purchased for $10,000. On April 2, 20X1, the price per share of Sax Company stock is $23.75. The price remains at $23.75 through the date of the expiration of the call option. Prepare the journal entries to record the initial acquisition of the option and the expiration of the option 6 months later.  

Solutions

Expert Solution

A)

Journal entry to record the purchase of Bond as on January 1, 20X1 by Stella Entity:

Journal Debit Credit
Investment in bond $900000
To cash $900000

Journal entry for eventual derecognition of the bonds by Stella Entity:

Sale price of Bond as on January 1, 20X3 = 875000

Value of Bond as on January 1, 20X3 = 934320

Loss on sale of bond = Value of Bond - Sale price of Bond

= 934320 - 875000 = 59320

Journal:

Journal Debit Credit
Cash $875000
Loss on sale of investment $59320
To investment in bond $934320

B)

Exercise date of option on 10000 shares = April 1, 20X1

Expiry date of option = October 1, 20X1

Strike price = $25

Option premium paid = $10000

Call option is taken for upside betting and it is exercised only when the price of share on which call option is taken is above exercise price i.e. strike price. If the price of share is below exercise price then call option is lapsed and premium paid to take call option is considered as net loss to the buyer of option.

In our question, Strike price which is also known as exercise price is $25 and price of share on the date of expiration is $23.75 which is below the strike price of $25. It means that call option is lapsed and loss to the buyer is option premium paid i.e. $10000.

Journal entry to record the initial acquisition of the option:

Date journal Debit Credit
April 1 20X1 call option    $10000
To cash $10000
(Option premium paid to purchase call option)

Journal entry to record the loss on expiration of option:

Date Journal Debit Credit
Oct. 1 20X1 loss on expiry of option $1000/
To call option $10000
(Loss recognized on expiry of option)

For any query please comment and

DO GIVE POSITIVE RATING


Related Solutions

On January 1, 2018, Entity A issued 8% bonds dated January 1, 2018, with a face...
On January 1, 2018, Entity A issued 8% bonds dated January 1, 2018, with a face amount of $10 million. The bonds mature in 2022 (5 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. A. What was the issue price of the bonds? B. Prepare the journal entry to record the bond issuance. C. Prepare the journal entry to record interest on June 30, 2018,...
On January 1, 2018, Entity A issued 8% bonds dated January 1, 2018, with a face...
On January 1, 2018, Entity A issued 8% bonds dated January 1, 2018, with a face amount of $10 million. The bonds mature in 2022 (5 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. A. Prepare a partial balance sheet showing the bonds at December 31, assuming that Entity A had used the effective interest method from the inception. B. Why might a company utilize...
On January 1, 2021, NFB Visual Aids issued $900,000 of its 20-year, 10% bonds. The bonds...
On January 1, 2021, NFB Visual Aids issued $900,000 of its 20-year, 10% bonds. The bonds were priced to yield 12%. Interest is payable semiannually on June 30 and December 31. NFB Visual Aids records interest expense at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2021, the fair value of the bonds was $768,000 as determined by their market value in the over-the-counter market. General (risk-free) interest rates did...
On January 1, 2018, NFB Visual Aids issued $900,000 of its 20-year, 10% bonds. The bonds...
On January 1, 2018, NFB Visual Aids issued $900,000 of its 20-year, 10% bonds. The bonds were priced to yield 12%. Interest is payable semiannually on June 30 and December 31. NFB Visual Aids records interest expense at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $768,000 as determined by their market value in the over-the-counter market. General (risk-free) interest rates did...
National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $900,000 on...
National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $900,000 on January 1, 2018. The bonds mature on December 31, 2021 (4 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the...
On January 1, 20X1, WP Industries issued $200,000 (face value) of bonds with a stated (coupon)...
On January 1, 20X1, WP Industries issued $200,000 (face value) of bonds with a stated (coupon) rate of 6%. The bonds pay interest semi-annually on June 30 and December 31 and mature in 15 years. If the market rate of interest on the issue date was 8%, the bonds will sell for Select one: a. $200,000 b. $171,420 c. $239,201 d. $165,416 e. $165,762
On January 1, 2020, Ironman Steel issued $900,000, 8-year bonds for $990,000. The stated rate of...
On January 1, 2020, Ironman Steel issued $900,000, 8-year bonds for $990,000. The stated rate of interest was 9% and interest is paid annually on December 31. Required: Prepare the amortization table for Ironman Steel's bonds. If required, round your answers to nearest whole value. If an amount box does not require an entry, leave it blank and if the answer is zero, enter "0". Ironman Steel Amortization Table Period Cash Payment (Credit) Interest Expense (Debit) Premium on Bonds Payable...
The Rockstar Corporation issued 10-year $900,000 par 6% convertible bonds on January 1, 2018 at 98....
The Rockstar Corporation issued 10-year $900,000 par 6% convertible bonds on January 1, 2018 at 98. The bonds have a par value of $1,000 with interest payable annually. Each bond is convertible into 10 shares of common stock; in two years this ratio will increase, meaning that each bond will be convertible into 30 shares of common stock. Assume Rockstar uses straight-line amortization for its bonds and that its effective tax rate is 35%. Net income in 2018 is $2,600,000...
Able Company issued $630,000 of 8 percent first mortgage bonds on January 1, 20X1, at 104....
Able Company issued $630,000 of 8 percent first mortgage bonds on January 1, 20X1, at 104. The bonds mature in 20 years and pay interest semiannually on January 1 and July 1. Prime Corporation purchased $420,000 of Able’s bonds from the original purchaser on December 31, 20X5, for $416,000. Prime owns 70 percent of Able’s voting common stock. Required: a. Prepare the worksheet consolidation entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated...
Suspect Company issued $1,020,000 of 9 percent first mortgage bonds on January 1, 20X1, at 104....
Suspect Company issued $1,020,000 of 9 percent first mortgage bonds on January 1, 20X1, at 104. The bonds mature in 20 years and pay interest semiannually on January 1 and July 1. Prime Corporation purchased $680,000 of Suspect’s bonds from the original purchaser on January 1, 20X5, for $675,000. Prime owns 60 percent of Suspect’s voting common stock. Required: a. Prepare the worksheet consolidation entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT