Chapter D, Problem D.4BP

1.

To determine

To Record: The Company TS’s investment on January 1.

Explanation of Solution

Record the Company TS’s investment on January 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.

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

To 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		4,550
	Investments (difference amount)		439
	Interest revenue			4,989
	(To record semi-annual interest revenue)

Table (2)

Working Notes:

Calculate the cash received.

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

Calculate the interest revenue for the first six months.

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

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 less then stated interest rate. It decreases the investments value. Thus, investments are credited with $439.
• Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $4,989.

3.

To determine

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

Explanation of Solution

Date	Account title and explanation	Post ref.	Debit $	Credit $
December 31	Cash		4,550
	Investments (difference amount)		457
	Interest revenue			5,007
	(To record semi-annual interest revenue)

Table (1)

Working Notes:

Calculate the cash received.

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

Calculate the interest revenue for the first six months.

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

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 less then stated interest rate. It decreases the investments value. Thus, investments are credited with $457.
• Interest revenue is a component of the owners’ equity. It increases the owners’ equity. Thus, interest revenue is credited with $5,007.

4.

To determine

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, it is 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.