Morgan Corp. purchased $600,000 of 8% bonds of Thompson Inc.on January 1, 2022, paying $567,300. The bonds mature January 1,2032; interest is payable each July 1 and January 1. The discount of$32,700 provides an effective yield of 9%. Morgan Corp. uses theeffective-interest method and plans to hold these bonds tomaturity.On July 1, 2022, Morgan Corp. should increase its Held-to-MaturityDebt Securities account for the Thompson Inc. bonds by:a. $3,270b. $1,635c. $1,529d. $978

Step 1: Definition of Effective-Interest MethodThe effective-interest method amortizes bond…

Answered: Morgan Corp. purchased $600,000 of 8%…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter13: Investments And Long-term Receivables

Section: Chapter Questions

Problem 1RE

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On July 1, 2019, Aldrich Company purchased as an available-for-sale security 200,000 face value, 9% U.S. Treasury notes for 194,000. The notes mature July 1, 2020, and pay interest semiannually on January 1 and July 1. The notes were sold on December 1, 2019, for 199,000. Aldrich normally uses straight-line amortization on all of its notes. In its income statement for the year ended December 31, 2019, what amount should Aldrich report as a gain on the sale of the available-for-sale security? a. 2,500 b. 3,500 c. 5,000 d. 6,000
On January 1, 2019, Brewster Company issued 2,000 of its 5-year, 1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Brewster uses the effective interest method of amortization. On December 31, 2023, Brewster extinguished the 2,000 bonds early through acquisition in the open market for 1,980,000. On July 1, 2022, Brewster issued 5,000 of its 6-year, 1,000 face value, 10% convertible bonds dated July 1 at an effective annual interest rate (yield) of 12%. The bonds are convertible at the option of the investor into Brewsters common stock at a ratio of 10 shares of common stock for each bond. Brewster uses the effective interest method of amortization. On July 1, 2023, an investor in Brewsters convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewsters common stock, which had a market value of 105 per share at the date of the conversion. Required: 1. Using the information about Brewster, answer the following questions: a. Were the 11% bonds issued at par, at a discount, or at a premium? Why? b. Is the amount of interest expense for the 11% bonds using the effective interest method of amortization higher in the first or second year of the life of the bond issue? Why? 2. Using the information about Brewster, explain the following: a. How is a gain or loss on early extinguishment of debt determined? Does the early extinguishment of the 11% bonds result in a gain or loss? Why? b. How does Brewster report the early extinguishment of the 11% bonds on the 2023 income statement? 3. Based on the information provided about Brewster, answer the following questions: a. Does recording the conversion of the 10% convertible bonds into common stock under the book value method affect net income? What is the rationale for the book value method? b. Does recording the conversion of the 10% convertible bonds into common stock under the market value method affect net income? What is the rationale for the market value method?
Bats Corporation issued 800,000 of 12% face value bonds for 851,705.70. The bonds were dated and issued on April 1, 2019, are due March 31, 2023, and pay interest semiannually on September 30 and March 31. Bats sold the bonds to yield 10%. Required: 1. Prepare a bond interest expense and premium amortization schedule using the straight-line method. 2. Prepare a bond interest expense and premium amortization schedule using the effective interest method. 3. Prepare any adjusting entries for the end of the fiscal year, December 31, 2019, using the: a. straight-line method of amortization b. effective interest method of amortization 4. Assume the company retires the bonds on June 30, 2020, at 103 plus accrued interest. Prepare the journal entries to record the bond retirement using the: a. straight-line method of amortization b. effective interest method of amortization
On January 1, 2025, Hummer Company purchased 5% bonds, having a maturity value of $500,000 for $428,938. The bonds provide the bondholders with a 7% yield. They are dated January 1, 2025, and mature January 1, 2035, with interest receivable June 30 and December 31 of each year. Hummer Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale. The fair value of the bonds at December 31 of each year-end is as follows. 2025 $430,000 2026 2027 (a) (b) (c) 425,000 420,000 2028 $450,000 2029 470,000 Prepare the journal entry at the date of the bond purchase. Prepare the journal entries to record the interest received and recognition of fair value Prepare the journal entry to record the recognition of fair value for 2026.
On January 1, 2023, Marigold Corporation purchased a newly issued $1,250,000 bond. The bond matured on December 31, 2025, and paid interest at 6% every June 30 and December 31. The market interest rate was 8%. Marigold's fiscal year-end is October 31, and the company had the intention and ability to hold the bond until its maturity date. The bond will be accounted using the amortized cost model. Click here to view Table A.2-PRESENT VALUE OF 1-(PRESENT VALUE OF A SINGLE SUM) Click here to view Table A.4-PRESENT VALUE OF AN ORDINARY ANNUITY OF 1 (a) Calculate the price paid for the bond using a financial calculator or Excel functions. (Round answers to 2 decimal places, eg. 52.75.) PV S
On January 1, 2023, Marigold Corporation purchased a newly issued $1,250,000 bond. The bond matured on December 31, 2025, and paid interest at 6% every June 30 and December 31. The market interest rate was 8%. Marigold's fiscal year-end is October 31, and the company had the intention and ability to hold the bond until its maturity date. The bond will be accounted using the amortized cost model. Click here to view Table A.2 - PRESENT VALUE OF 1-(PRESENT VALUE OF A SINGLE SUM) Click here to view Table A.4 - PRESENT VALUE OF AN ORDINARY ANNUITY OF 1 (a) Calculate the price paid for the bond using a financial calculator or Excel functions. (Round answers to 2 decimal places, e.g. 52.75.) PV $
On January 1, 2023, Sandhill Corporation purchased a newly issued $1,575,000 bond. The bond matured on December 31 , 2025 , and paid interest at 6% every June 30 and December 31 . The market interest rate was 8%. Sandhill's fiscal year-end is October 31 , and the company had the intention and ability to hold the bond until its maturity date. The bond will be accounted using the amortized cost model. Click here to view Table A.2 - PRESENT VALUE OF 1 - (PRESENT VALUE OF A SINGLE SUM) Click here to view Table A.4 - PRESENT VALUE OF AN ORDINARY ANNUITY OF 1 (a) Calculate the price paid for the bond using a financial calculator or Excel functions.
On January 1, 2025, Crane Company purchased 6% bonds, having a maturity value of $530,000 for $457,971. The bonds provide the bondholders with a 8% yield. They are dated January 1, 2025, and mature January 1, 2035, with interest receivable June 30 and December 31 of each year. Crane Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale. The fair value of the bonds at December 31 of each year-end is as follows. 2025 2026 2027 (a) (b) (c) No. (a) $459,297 454,297 2029 (b) 449,297 (Round answers to O decimal places, e.g. 2,525. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. List all debit entries before credit entries.) Date 2028 Prepare the journal entry at the date of the bond purchase. Prepare the journal entries to record the interest received and recognition…
On January 1, 2020, Hummer Company purchased 5% bonds, havinga maturity value of $500,000, for $428,938. The bonds provide the bondholders with a 7% yield. They are dated January 1, 2020, and mature January 1, 2030, with interest receivable June 30 and December 31 of each year. Hummer Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.(a) Prepare the journal entry at the date of the bond purchase.(b) Prepare the first 3 years of a bond amortization schedule.(c) Prepare the journal entries to record the interest received and the amortization for 2020.
On January 1, 2020, Hummer Company purchased 5% bonds, havinga maturity value of $500,000, for $428,938. The bonds provide the bondholders with a 7% yield. They are dated January 1, 2020, and mature January 1, 2030, with interest receivable June 30 and December 31 of each year. Hummer Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available for sale. The fair value of the bonds at December 31 of each year end as follows: 2020: $430,000 2021: 425,000 2022: 420,000 2023: 450,000 2024: 470,000 (a) Prepare the journal entry at the date of the bond purchase.(b) Prepare the journal entries to record the interest received and recognition of fair value for 2020.(c) Prepare the journal entry to record the recognition of fair value for 2021.
On July 1, 2023, Riverbed Aggregates Ltd. purchased 6% bonds with a maturity value of $125,000 for $129,482. The bonds provide the bondholders with a 5% yield. The bonds mature four years later, on July 1, 2027, with interest receivable June 30 and December 31 of each year. Riverbed uses the effective interest method to allocate unamortized discount or premium. The bonds are accounted for using the FV-OCI model with recycling. Riverbed has a calendar year end. The fair value of the bonds at December 31, 2023 and 2024, was $129,173 and $127,762, respectively. Assume fair value adjustments are recorded at year end only. Immediately after collecting interest on December 31, 2024, the bonds were sold for $127.762. (a) Prepare the journal entry at the date of the bond purchase. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. List debit entry…
On January 1, 2023, Concord Limited paid $415,744 for 10% bonds with a maturity value of $385,000. The bonds provide thebondholders with a 8% yield. They are dated January 1, 2023, and mature on January 1, 2028, with interest receivable on December31 of each year. Concord accounts for the bonds using the amortized cost approach, applies ASPE using the effective interestmethod, and has a December 31 year end.

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