Question

In: Accounting

1.    Precision Castparts builds sophisticated machinery for the aerospace industry and frequently invests excess cash in corporate...

1.    Precision Castparts builds sophisticated machinery for the aerospace industry and frequently invests excess cash in corporate bonds, which it holds to maturity. The following transactions relate to Precision's bond investments during 2019. Precision has the positive ability and intent to hold all bonds until maturity, and their year-end is December 31.

     Apr. 30th: Purchased $16 million of 5% Marmon Corp. bonds at face value.

     June 30th: Received the $400,000 semiannual interest payment on the Marmon bonds.

     Oct. 1st: Purchased $10 million of 4% General Re bonds at face value. These   bonds pay interest on July 1st and January 1st of each year.

     Dec. 1st: Sold the Marmon bonds for $16.5 million.

     Dec. 31st: Prepare any necessary adjusting entries. The fair value of the General Re bonds was $10.2 million. Remember to accrue interest.

1.    Debt Securities - AFS. Use the same data as Problem 1, but now assume the bonds are classified as Available for Sale.

a.    Prepare the appropriate journal entry for each transaction above, as well as any adjusting journal entries necessary at year-end.

a.    Indicate amounts that Precision will show on its 2019 Income Statement, Statement of Comprehensive Income, and Balance Sheet

                                                             i.     Income Statement

                                                           ii.     Statement of Comprehensive Income

                                                        iii.     Balance Sheet

Solutions

Expert Solution

Held to Maturity:-
Journal Entries
Amount in Millions $
Date Account Tiltles Debit Credit
April.30 Debt Investments-HTM-5% Marmon Corp. Bonds        16.00
Cash        16.00
June.30 Cash          0.40
Interest Revenue          0.40
Oct.1 Debt Investments-HTM-4% General Re Bonds        10.00
Cash        10.00
Dec.1 Cash        16.50
Debt Investments-HTM-5% Marmon Corp. Bonds        16.00
Gain on sale of Debt Investments          0.50
Dec.31 Interest Receivable          0.10
Interest Revenue          0.10
( 10 x 4% x 3 ) /12
Debt Investment -HTM will not have any fair value adjustment at year end.
Available for Sale:-
Journal Entries
Amount in Millions $
Date Account Tiltles Debit Credit
April.30 Debt Investments-AFS-5% Marmon Corp. Bonds        16.00
Cash        16.00
June.30 Cash          0.40
Interest Revenue          0.40
Oct.1 Debt Investments-AFS-4% General Re Bonds        10.00
Cash        10.00
Dec.1 Cash        16.50
Debt Investments-AFS-5% Marmon Corp. Bonds        16.00
Gain on sale of Debt Investments          0.50
Dec.31 Interest Receivable          0.10
Interest Revenue          0.10
( 10 x 4% x 3 ) /12
Dec.31 Fair value adjustment -AFS          0.20
Unrealized Gain          0.20
( 10.2 - 10 )
(i) Income Statement
Amount in Millions $
Interest Revenue                                0.50 (0.40 + 0.10 )
(ii) Statement of comprehensive income
Amount in Millions $
Unrealized gain                                0.20
(iii) Balance Sheet
Amount in Millions $
Assets*
Debt Investments-AFS-4% General Re Bonds                             10.00
Add: Fair value adjustment -AFS                                0.20
Total

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