Question

 

Account for debt investment reported at amortized cost—effective-interest method.

Strand Corp. purchased $300,000 of five-year, 4% Hydrocor bonds at 99 on June 30, 2017. Strand Corp. purchased the bonds to earn interest. Interest is paid semi-annually each June 30 and December 31. The semi-annual amortization amount for the first interest period is $273 determined using the effective-interest method. At December 31, 2017, the bonds were trading at 98. Prepare the required journal entries on June 30 and December 31, 2017.    Question 2)

 

Account for debt investment reported at amortized cost—effective-interest method.

On July 1, 2017, Moon Corporation, a private company, purchased $400,000 of six-year, 6% Star Corporation bonds for $420,000. The bonds pay interest each June 30. The bonds were purchased to earn interest and the market interest rate at the time of purchase was 5%. The company uses the effective-interest method to amortize any premium or discount on debt security investments. Prepare the required journal entries on July 1 and December 31, 2017, and June 30, 2018.

 

BE16-7  

 

Account for fair value through profit or loss investment.

(LO 3) AP

Using the data presented in BE16-5, assume Strand Corp. is a public company and that it purchased Hydrocor's bonds at par for trading purposes. Prepare the journal entries to record (a) the purchase of the bonds on June 30, 2017; (b) the receipt of the first interest payment on December 31, 2017; and (c) any required adjusting journal entries on December 31, 2017.

 

BE16-8  

 

Account for sale of fair value through profit or loss investment.

(LO 3) AP

On August 1, McLain Finance Inc. buys 3,000 Datawave common shares for trading purposes for $114,000 cash. On October 15, McLain receives a cash dividend of $2.75 per share from Datawave. On December 1, McLain sells the shares for $120,000 cash. Prepare the journal entries to record the (a) purchase of the shares, (b) receipt of the dividend, and (c) sale of the shares.

 

BE16-9  

 

Account for fair value through other comprehensive income investment.

(LO 3) AP

On April 1, 2017, Perfect Plastics Company purchased 40,000 common shares in Ecotown Ltd. for $15 per share. Management has designated the investment as FVTOCI. On December 5, Ecotown paid dividends of $0.10 per share and its shares were trading at $17 per share on December 31. Prepare the required entries to record the purchase, dividends, and year-end adjusting journal entry (if any) for this investment.

Answer 1

	Date	Account title & explanation		Debit	Credit
				Amount in $	Amount in $
Requirement Q-1	In the books of Strands Corp.
BE16-5	June 30, 2017	Investment in Bonds		300000
			Discount on Bonds investment		3000
			Cash		297000
		To record the investment in bonds
	Dec 31, 2017	Cash		6000
		Discount on bonds investment		273
			Interest Income		6273
		To record the Interest income on bonds
Requirement Q-2	In the Books of Moon Corp.
BE16-6	June 30, 2017	Investment in Bonds		400000
		Premium on bonds investment		20000
			Cash		420000
		To record the investment in bonds
	Dec 31, 2017	Cash		24000
			Premium on bonds investment		3000
			Interest Income		21000
		To record the Interest income on bonds
	Year	Period	Cashflow	PVIF@5%	Present value	Effective Interest	Amortized premium	Carrying Value of Bonds
	2017	Jun-30		1			20000	420000
	2018	Jun-30	24000	0.952380952	22857.14286	21000	17000	417000
	2019	Jun-30	24000	0.907029478	21768.70748	20850	13850	413850
	2020	Jun-30	24000	0.863837599	20732.10236	20692.5	10542.5	410542.5
	2021	Jun-30	24000	0.822702475	19744.8594	20527.13	7069.625	407069.6
	2022	Jun-30	24000	0.783526166	18804.628	20353.48	3423.106	403423.1
	2023	Jun-30	24000	0.746215397	17909.16952	20171.16	0	400000
	2023	Jun-30	400000	0.746215397	298486.1587
					420302.7683
Requirement BE-16-7	In the books of Strands Corp.
	June 30, 2017	Investment in Bonds		297000
			Cash		297000
		To record the investment in bonds
	Dec 31, 2017	Cash		6000
			Interest Income		6000
		To record the Interest income on bonds
	Dec 31, 2017	Unrecognized Loss(Fair value adjustment)		3000
			Investment in Bonds		3000
		To record the fair value adjustment to be passed through Income statement
Requirement BE16-8	In the Books of McLain Finance Inc.,
	Aug-01	Investment in shares(Trading) of Datawave		114000
			Cash		114000
		To record the purchase of shares of Datawave
	Oct-15	Cash		8250		=3000*2.75
			Dividend Income		8250
		To record the dividend income
	Dec-01	Cash		120000
			Realized gain on sale of shares		6000
			Investment in shares(Trading) of Datawave		114000
		To record the sale of share
Requirement BE16-9
	Apr 1, 2017	Investment in shares(FVTOCI) of Ecotown		600000		=40000*15
			Cash		600000
		To record the purchase of shares
	Dec 5, 2017	Cash		4000		=40000*0.1
			Dividend Income		4000
		To record the dividend income
	Dec 31, 2017	Investment in shares(FVTOCI) of Ecotown		80000		=40000*2
			Fair value adjustment(unrealized gain)(OCI)		80000
		To record increase in investment through fair value adjustment