In: Accounting
Djinn Co. made two bond investments on 1/1/17:
Investment A: $5,000,000, 8% 10-year bonds that pay interest annually on 12/31 of each year. The market rate of bonds with a comparable risk was 9%. These bonds were classified as held-to-maturity (HTM). The market rate of these bonds at 12/31/17 was 8%.
Investment B: $4,000,000, 6% 10-year bonds that pay interest annually on 12/31 of each year. The market rate of bonds with a comparable risk was 7%. These bonds were classified as available for sale (AFS). The market rate of these bonds at 12/31/17 was 7%.
Provide the balance sheet value for each of these investments at 12/31/17.
Provide income statement (net income and other comprehensive income) effects for each of these bonds.
Provide statement of cash flow effects for each of these bonds.
Ifrit Corp. had the following portfolio of equity securities at 1/1/17. The securities were purchased in prior years.
Cost at Purchase |
Market Value at 12/31/16 |
Market Value at 12/31/17 |
|
Trading Securities |
|||
Equity Security A |
4,000 shares @ $35 per share |
$37 per share |
$43 per share |
Equity Security B |
6,000 shares @ $25 per share |
$30 per share |
$28 per share |
Available for Sale Securities |
|||
Equity Security C |
5,000 shares @ $50 per share |
$48 per share |
$43 per share |
Equity Security D |
10,000 shares @ $61 per share |
$65 per share |
Sold 10,000 @ $73 per share |
Equity Security C also pays annual dividends of $3 per share.
Provide balance sheet (asset, liability, equity) effects for each of these classes of securities for the year 2017. Note that the securities were not purchased in 2017. (6 pts)
Provide income statement effects (net income and other comprehensive income) for 2017. (6 pts)
Bond 1
The PV (present value) of the bond is as under:
(8%X 5,000,000 X (1-(1+9%)-10)/9%) + 5,000,000 X(1=9%)10 = 4,679,117
The discount on purchase would be = 320,883 i.e. $5,000,000 - $4,679,117
Balance Sheet Impact:
At Inception
Investment in Bonds increases by $5,000,000
Discount on Bonds increases by $320,883
Cash decreases by $4,679,117
Annually
Cash increases = $400,000
Discount on Bonds decrease = $32,088.3
Income Statement Impact:
Annually
Interest Income increases = $432,088.3
Cash Flow Impact:
Inception
Cash outflow of $4,679,117
Annually
Cash inflow of = $400,000
Note: Held to Maturity bonds are not adjusted for changes in fair value. Hence the market interest rate for these bonds do not matter.
Bond 2
These bonds would be accounted similar to the above. Except that the carrying value of the bond would be adjusted for any changes in the Fair Value.
PV of the bonds are $3,719,056
Balance Sheet Impact:
At Inception
Cash decrease= $3,719,056
Investment in Bonds increase= $4,000,000
Fair Value Adjustments increase = $280,943
Annually
Cash increase = $400,000
Fair Value Adjustment decrease = $28,094.3
Income Statement Impact:
Annually
Interest Income increase= $240,000
Unrealized Gain/Loss = $28,094.3
Cash Flow Impact:
Inception
Cash outflow of $3,719,056
Annually
Cash inflow of = $240,000