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1.
Record the Incorporation JI’s investment on January 1.
1.
Explanation of Solution
Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.
Record the Incorporation JI’s investment on January 1.
| Date | Account title and explanation |
Post ref. |
Debit $ |
Credit $ |
| January 01 | Investments | 152,000 | ||
| Cash | 152,000 | |||
| (To record purchase of bonds) |
Table (1)
Purchase of bonds:
- Investments are the assets. Purchases of investments increase the assets value. Thus, investments are debited with $152,000.
- Cash is a current asset. Purchase of bonds decreases the cash balance. Thus, cash is credited with $152,000.
2.
Record the interest revenue earned by Incorporation JI for the first six months ended June 30.
2.
Explanation of Solution
Record the interest revenue earned by Incorporation JI for the first six months ended June 30.
| Date | Account title and explanation |
Post ref. |
Debit $ |
Credit $ |
| June 30 | Cash (1) | 7,200 | ||
| Investments (difference amount) | 400 | |||
| Interest revenue (2) | 7,600 | |||
| (To record semi-annual interest revenue) |
Table (2)
Interest revenue on June 30:
- Cash is a current asset. Interest revenue increases the cash balance. Thus, cash is debited with $7,200.
- Investments are the assets. Market rate is more than stated interest rate. It decreases the investments value. Thus, investments are credited with $400.
- Interest revenue is a component of the
stockholders’ equity . It increases the owners’ equity. Thus, interest revenue is credited with $7,600.
Working Notes:
Calculate the cash received.
Therefore, cash received is $7,200.
Calculate the interest revenue for the first six months.
Therefore, the interest revenue for the first six months is $7,600.
3.
Record the interest revenue earned by Incorporation JI for the next six months ended December 31.
3.
Explanation of Solution
Record the interest revenue earned by Incorporation JI for the next six months ended December 31:
| Date | Account title and explanation |
Post ref. |
Debit $ |
Credit $ |
| December 31 | Cash (3) | 7,200 | ||
| Investments (difference amount) | 420 | |||
| Interest revenue (4) | 7,620 | |||
| (To record semi-annual interest revenue) |
Table (3)
Interest revenue on December 31:
- Cash is a current asset. Interest revenue increases the cash balance. Thus, cash is debited with $7,200.
- Investments are the assets. Market rate is more than stated interest rate. It increases the investments value. Thus, investments are debited with $420.
- Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $7,620.
Working Notes:
Calculate the cash received.
Therefore, cash received is $7,200.
Calculate the interest revenue for the next six months.
Therefore, the interest revenue for the next six months is $7,620.
4.
Compute the amount of investment that would be reported by Incorporation JI in the December 31
4.
Explanation of Solution
Incorporation JI will report its investment at its amortized cost (book value) of $152,820
As held-to-maturity securities will not be sold until its maturity, it is irrelevant that whether there is an increase or decrease in the fair value of the securities between the time of acquiring a debt security, and the day of its maturity. Hence, it is for this reason, Incorporation JI reports its held-to-maturity securities at an amortized cost in its balance sheet rather than recording them at a fair value.
5.
Record any necessary fair value adjustment, if the investments are not intended to hold the debt securities until maturity but also has no intention to sell them any time soon.
5.
Explanation of Solution
Available-for-sale investments: Available-for-sale investments are the investments in debt or equity securities, where the investor wishes to holds less than 20% of voting stock, and neither referred as trading or hold-to-maturity investments. For debt securities, the investor do not wish to hold it till maturity, and hence reported either as current assets or as long-term assets in the balance sheet depending upon the holding period of the security.
Record any necessary fair value adjustment:
| Date | Account Title and Explanation |
Post Ref. |
Debit $ |
Credit $ |
| December 31 | Investments | 7,180 | ||
| Unrealized holding gain – net income (5) | 7,180 | |||
| (To record the investment at adjusted fair value ) |
Table (4)
Explanation for the above
- Investments are the assets. There is an Increase in the investments value by $7,180 due to fair value. Thus, investments are debited with $7,180.
- Unrealized holding gain is a component of the stockholders’ equity (net income). It increases the net income by $7,180. Thus, it is credited with $7,180.
Working notes:
Compute the unrealized holding gain – net income.
| Particulars |
Amount $ |
| Investments (book value) | 152,820 |
| Less: Fair value of the investments | 160,000 |
| Unrealized holding gain-net income | (7,180) |
(5)
Table (5)
Note: In the given situation the investments become Available for sale securities. So the unrealized holding loss reports as other comprehensive income in the current year’s income statement.
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Chapter D Solutions
FINANCIAL ACCT(LOOSELEAF)>CUSTOM<-W/COD
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