Chapter D, Problem 4PB

1.

To determine

Record the Company TS’s investment as on January 01.

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 Company TS’s investment on January 1.

Date	Account title and explanation	Post ref.	Debit $	Credit $
January 01	Investments		124,728
	Cash			124,728
	(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 $124,728.
• Cash is a current asset. Purchase of bonds decreases the cash balance. Thus, cash is credited with $124,728.

2.

To determine

Record the interest revenue earned by Company TS for the first six months ended June 30.

Explanation of Solution

Record the interest revenue earned by Company TS for the first six months ended June 30.

Date	Account title and explanation	Post ref.	Debit $	Credit $
June 30	Cash (1)		4,550
	Investments (difference amount)		439
	Interest revenue (2)			4,989
	(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 $4,550.
• Investments are the assets. Market rate is more than stated interest rate. It increases the investments value. Thus, investments are debited with $439.
• Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $4,989.

Working Notes:

Calculate the cash received:

$\begin{array}{c}\text{Cash received=Face value of bonds}\times \text{Rate}\times \frac{6\text{months}}{12\text{months}}\\ =\$130,000\times 7\%\times \frac{6}{12}\\ =\$4,550\end{array}$ (1)

Therefore, cash received is $4,550.

Calculate the interest revenue for the first six months:

$\begin{array}{c}\text{Interest revenue=Carrying value of bonds}\times \text{Market Rate}\times \frac{6\text{months}}{12\text{months}}\\ =\$124,728\times 8\%\times \frac{6}{12}\\ =\$4,989\end{array}$ (2)

Therefore, the interest revenue for the first six months is $4,989.

3.

To determine

Record the interest revenue earned by Company TS for the next six months ended December 31.

Explanation of Solution

Record the interest revenue earned by Company TS for the next six months ended December 31:

Date	Account title and explanation	Post ref.	Debit $	Credit $
December 31	Cash (3)		4,550
	Investments (difference amount)		457
	Interest revenue (4)			5,007
	(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 $4,550.
• Investments are the assets. Market rate is more than stated interest rate. It increases the investments value. Thus, investments are debited with $457.
• Interest revenue is a component of the stockholders’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $5,007.

Working Notes:

Calculate the cash received:

$\begin{array}{c}\text{Cash received=Face value of bonds}\times \text{Rate}\times \frac{6\text{months}}{12\text{months}}\\ =\$130,000\times 7\%\times \frac{6}{12}\\ =\$4,550\end{array}$ (3)

Therefore, cash received is $4,550.

Calculate the interest revenue for the next six months:

$\begin{array}{c}\text{Interest revenue=Carrying value of bonds}\times \text{Market Rate}\times \frac{6\text{months}}{12\text{months}}\\ =\left(\$124,728+\$439\right)\times 8\%\times \frac{6}{12}\\ =\$5,007\end{array}$ (4)

Therefore, the interest revenue for the next six months is $5,007.

4.

To determine

Compute the amount at which Company TS will report its investment in the December 31 balance sheet and the reason behind it.

Explanation of Solution

Company TS will report its investment at its amortized cost (book value) of $125,624 $\left(\$124,728+\$439+\$457\right)$ in its December 31 balance sheet.

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, for this reason, Company TS reports its held-to-maturity securities at an amortized cost in its balance sheet rather than recording them at a fair value.

5.

To determine

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.

Explanation of Solution

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

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 journal entry:

• 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)