
Concept explainers
1.
Complete the first three rows of an amortization table for Corporation R.
1.

Explanation of Solution
Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made debt securities such as bonds.
Complete the first three rows of an amortization for D.
Given, 8% bonds face value of $800,000 purchased.
Date | Cash received | Interest revenue |
Amortization of discount | Carrying value |
(1) | (2) | (3) | (4) | (5) |
01/01 | $ 747,968 | |||
30/06 | $ 32,000 | $ 33,659 | $ 1,659 | 749,627 |
31/12 | 32,000 | 33,733 | 1,733 | 751,360 |
Table (1)
Note: The interest revenue is calculated semi-annually.
2.
Record the purchase of the bonds by Corporation R on January 1 and the receipt of the first two semi-annual interest payments on June 30 and December 31.
2.

Answer to Problem 12E
Record the purchase of the bonds by D on January 1 and the receipt of the first two semi-annual interest payments on June 30 and December 31.
Date | Account title and explanation |
Post ref. |
Debit $ |
Credit $ |
January 01 | Investments | 747,968 | ||
Cash | 747,968 | |||
(To record purchase of bonds) | ||||
June 30 | Cash | 32,000 | ||
Investments (difference amount) | 1,659 | |||
Interest revenue | 33,659 | |||
(To record semi-annual interest revenue) | ||||
December 31 | Cash | 32,000 | ||
Investments (difference amount) | 1,733 | |||
Interest revenue | 33,733 | |||
(To record semi-annual interest revenue) |
Table (2)
Note: Interest revenue values are taken from the table (1) of the requirement (1)
Explanation of Solution
Purchase of bonds:
- Investments are the assets. Purchases of investments increase the assets value. Thus, investments are debited with $747,968.
- Cash is a current asset. Purchase of bonds decreases the cash balance. Thus, cash is credited with $747,968.
Interest revenue on June 30:
- Cash is a current asset. Interest revenue increases the cash balance. Thus, cash is debited with $32,000.
- Investments are the assets. Market rate is more than the stated interest rate. It increases the investments value. Thus, investments are debited with $1,659.
- Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $33,659.
Interest revenue on December 31:
- Cash is a current asset. Interest revenue increases the cash balance. Thus, cash is debited with $32,000.
- Investments are the assets. Market rate is more than the stated interest rate. It increases the investments value. Thus, investments are debited with $1,733.
- Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $33,733.
3.
Record the any necessary
3.

Answer to Problem 12E
Prepare the journal entries for fair value adjustment of the investments:
Date | Account Title and Explanation |
Post. Ref. |
Debit $ |
Credit $ |
December 31 |
Unrealized holding loss – other comprehensive income (1) | 1,360 | ||
Investments | 1,360 | |||
(To record the investment at adjusted fair value ) |
Table (3)
Explanation of Solution
Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.
To record the adjusted fair value of investments:
- Unrealized holding loss is a component of the
stockholders’ equity (net income). It decreases the net income by $1,360. Thus, it is debited with $1,360 - Investments are the assets. The value of investments is decreased by $1,360 due to the change in fair value. Thus, investments are credited with $1,360.
Working notes:
Compute the unrealized holding loss – Other Comprehensive income.
Particulars |
Amount $ |
Investments (book value) | 751,360 |
Less: Fair value of the investments | 750,000 |
Unrealized holding loss- Other Comprehensive income | $1,360 |
(1)
Table (4)
Therefore, Unrealized holding loss- Other Comprehensive income of Corporation R is $1,360.
4.
Calculate the net income and comprehensive income.
4.

Explanation of Solution
Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.
Comprehensive income: It’s a measure of company’s total income that includes unrealized gain that has not been received like gain on available for sale securities.
Calculate the net income and comprehensive income:
Particulars | Amount ($) |
Sales Revenue | $2,600,000 |
Operating expenses | (1,400,000) |
Interest revenue | 67,392 |
Net income | 1,267,392 |
Other comprehensive income: | |
Unrealized holding loss | (1,360) |
Comprehensive income | $1,266,032 |
Table (5)
Therefore, Corporation R’s net income and comprehensive income are $1,267,392 and 1,266,032.
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Chapter D Solutions
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