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1.
Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.
Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
To Journalize: The purchase of bonds of Company C by Company I on January 1, 2018.
1.
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Explanation of Solution
Prepare the
Date | Account Title | Debit ($) | Credit ($) |
01.01.18 | Investment in bonds | $150,000 | |
Discount on bond investment | $10,658 | ||
Cash | $139,342 | ||
(To record the purchase of bonds) |
Table (1)
- Investments is being made, this increases the assets; hence debit the investment.
- Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.
2.
To Journalize: The entries related to the bonds of Company C, assuming Company I accounts for the bonds as held-to-maturity.
2.
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Explanation of Solution
Held-to-maturity security: The debt securities which are held by the investor with the intent to hold the investment till its maturity are referred to as held-to-maturity securities.
Prepare the journal entry to record the investment made in Company C.
Date | Account Title | Debit ($) | Credit ($) |
01.01.18 | Investment in bonds | $150,000 | |
Discount on bond investment | $10,658 | ||
Cash | $139,342 | ||
(To record the purchase of bonds) |
Table (2)
- Investments is being made, this increases the assets; hence debit the investment.
- Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.
Prepare the journal entry to record the semiannual interest received from Company C on June 30, 2018.
Date | Account Title | Debit ($) | Credit ($) |
06.30.18 | Cash (1) | $4,500 | |
Discount on bond investment (3) | $377 | ||
Interest revenue (2) | $4,877 | ||
(To record the interest from bonds) |
Table (3)
- Cash is received, cash is an asset which is being increased; hence debit the cash account.
- Discount on bonds investment, is a liability which is decreased; hence debit the discount on bonds investment account.
- Interest revenue is a gain, which increases the
stockholder's equity ; hence credit the interest revenue account.
Working Notes:
Calculate the cash received.
Calculate the interest revenue.
Calculate the discount on bond investment.
Prepare the journal entry to record the semiannual interest received from Company C on December 31, 2018.
Date | Account Title | Debit ($) | Credit ($) |
12.31.18 | Cash (1) | $4,500 | |
Discount on bond investment (5) | $390 | ||
Interest revenue (4) | $4,890 | ||
(To record the interest from bonds) |
Table (4)
- Cash is received, cash is an asset which is being increased; hence debit the cash account.
- Discount on bonds investment, is a liability which is decreased; hence debit the discount on bonds investment account.
- Interest revenue is a gain, which increases the stockholder's equity; hence credit the interest revenue account.
Working Notes:
Calculate the interest revenue.
Calculate the discount on bond investment.
3.
To Journalize: The entries related to the bonds of Company C, assuming Company I accounts for the bonds as fair value option.
3.
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Explanation of Solution
Fair value: Fair value is the price at which, both seller and buyer agree to exchange the asset. So, fair value is the selling price to the seller and the purchase price for the buyer.
Prepare the journal entry to record the investment made in Company C.
Date | Account Title | Debit ($) | Credit ($) |
01.01.18 | Investment in bonds | $150,000 | |
Discount on bond investment | $10,658 | ||
Cash | $139,342 | ||
(To record the purchase of bonds) |
Table (5)
- Investments is being made, this increases the assets; hence debit the investment.
- Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.
Prepare the journal entry to record the loss on the bonds of Company C.
Date | Account Title | Debit ($) | Credit ($) |
06.30.18 | Unrealized holding loss—NI | $9,420 | |
Fair value adjustment (8) | $9,420 | ||
(To record the loss through adjustment) |
Table (6)
- Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
- Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on June 30, 2018.
Working Notes:
Compute the fair
Details | Amount ($) |
Interest on the bond (a) | $59,103 |
Value of the bonds (b) | $71,916 |
Fair value of bonds on June 30, 2018 (6) | $130,299 |
Table (7)
(6)
Calculate the interest on the bond.
Calculate the value of the bond.
Compute the value of bond as on June 30, 2018.
Details | Amount ($) |
Value paid for the bonds | $139,342 |
Add: Discount on bond investment | $377 |
Value of bonds on June 30, 2018 (7) | $139,719 |
Table (8)
(7)
Compute the fair value of bond as on June 30, 2018.
Details | Amount ($) |
Value of bonds on June 30, 2018 (7) | $139,719 |
Fair value of bonds on June 30, 2018 (6) | $130,299 |
Fair value adjustment (8) | $9,420 |
Table (9)
(8)
Prepare the journal entry to record the semiannual interest received from Company C on June 30, 2018.
Date | Account Title | Debit ($) | Credit ($) |
06.30.18 | Cash (1) | $4,500 | |
Discount on bond investment (3) | $377 | ||
Interest revenue (2) | $4,877 | ||
(To record the interest from bonds) |
Table (10)
- Cash is received, cash is an asset which is being increased; hence debit the cash account.
- Discount on bonds investment, is a liability which is decreased; hence debit the discount on bonds investment account.
- Interest revenue is a gain, which increases the stockholder's equity; hence credit the interest revenue account.
Prepare the journal entry to record the semiannual interest received from Company C on December 31, 2018.
Date | Account Title | Debit ($) | Credit ($) |
12.31.18 | Cash (1) | $4,500 | |
Discount on bond investment (5) | $390 | ||
Interest revenue (4) | $4,890 | ||
(To record the interest from bonds) |
Table (11)
- Cash is received, cash is an asset which is being increased; hence debit the cash account.
- Discount on bonds investment, is a liability which is decreased; hence debit the discount on bonds investment account.
- Interest revenue is a gain, which increases the stockholder's equity; hence credit the interest revenue account. Investment is an asset, which is reduced; hence credit the investments account.
Prepare the journal entry to record the loss on the bonds of Company C.
Date | Account Title | Debit ($) | Credit ($) |
06.30.18 | Unrealized holding loss—NI | $9,420 | |
Fair value adjustment (12) | $9,420 | ||
(To record the loss through adjustment) |
Table (12)
- Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
- Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 31, 2018.
Working Notes:
Compute the fair value of bond as on December 31, 2018.
Details | Amount ($) |
Interest on the bond (c) | $54,720 |
Value of the bonds (d) | $67,920 |
Fair value of bonds on December 31, 2018 (9) | $122,640 |
Table (13)
(9)
Calculate the interest on the bond.
Calculate the value of the bond.
Compute the value of bond as on December 31, 2018.
Details | Amount ($) |
Value paid for the bonds | $139,719 |
Add: Discount on bond investment | $390 |
Value of bonds on December 31, 2018 (10) | $140,109 |
Table (14)
(10)
Compute the fair value of bond as on December 31, 2018.
Details | Amount ($) |
Value of bonds on December 31, 2018 (10) | $140,109 |
Fair value of bonds on December 31, 2018 (9) | $122,640 |
Fair value adjustment (11) | $17,469 |
Table (15)
(11)
Compute the fair value of bond as on December 31, 2018.
Details | Amount ($) |
Fair value adjustment (11) | $17,469 |
Fair value adjustment (8) | $9,420 |
Fair value adjustment to be recorded (12) | $8,049 |
Table (16)
(12)
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Chapter 12 Solutions
INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
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