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intermediate accounting volume 2
Questions and Answers of
Intermediate Accounting Volume 2
Explain why and how bond discount and bond premium affect (a) the balance sheet and (b) the income statement of the investor.
What is the primary conceptual difference between the straight-line and effective interest methods of amortizing bond discount and premium?
Under GAAP, when is it appropriate to use the (a) straight-line interest method and (b) effective interest method of amortization for bond discount or premium?
What are convertible bonds? What are the primary reasons for their use?
Define extinguishment of debt.
When may extinguishment of debt occur? List the various ways in which extinguishment of debt occurs.
Explain how an accounting gain or loss to the debtor may occur when a call privilege is exercised.
When the issuer purchases its own debt securities in the open market to extinguish the debt, two entries must usually be made. Explain.
What is meant by refunding?
Interest rates have increased since a company issued its bonds. Why would the company want to refund the bonds with another issue of bonds paying a higher rate?
A company retired a bond issue early, at a loss. Is the company in an economically worse position after the retirement?
Why is the accounting different for nonconvertible bonds with detachable stock purchase warrants and nonconvertible bonds with nondetachable stock purchase warrants?
Match each security listed below with its usual classification: (1) trading securities, (2) available-for-sale securities, (3) equity method securities, (4) held-to-maturity securities, or (5) equity
On January 1, 2020, Lazer Inc. purchased for cash, ten \(\$ 1,000,4 \%\) bonds of Star Corp. at par. The bond interest is paid annually on January 1 of each year, and the bond maturity date is
On January 1, 2020, Baker Corp. purchased \(\$ 20,000\) of Chocolate Inc. bonds. These bonds pay 5\% interest annually on December 31 and mature December 31, 2029. The investment is classified as a
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation to yield \(10 \%\). The bonds pay \(9 \%\) interest, payable on a semiannual basis each July 1 and
Repeat Exercise 14-43, assuming discounts and premiums are amortized using the straight-line interest method.Exercise 14-43On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation at a market rate of \(6 \%\). The bonds pay \(5 \%\) interest, payable on a semiannual basis each July
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation at a market rate of \(6 \%\). The bonds pay \(5 \%\) interest, payable on a semiannual basis each July
Repeat Exercise 14 -45 except now assume that the market rate is 4\% on July \(1,2020\).Exercise 14 -45On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation
At December 31, 2020, the investments in the portfolio of the trading securities of Kennedy Company included the following.Requireda. Record the entry for the receipt of quarterly interest from the
At December 31, 2020, the investments in the portfolio of the trading securities of Kennedy Company included the following.Requireda. Record the entry for the receipt of quarterly interest from the
On January 1, 2020, Jules Company purchased for cash, \(\$ 50,000\) bonds (ten \(\$ 5,000\) bonds) of Android Corporation at a market rate of \(6 \%\). The bonds pay \(6.5 \%\) interest, payable on a
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation to yield \(10 \%\). The bonds pay \(9 \%\) interest, payable on a semiannual basis each July 1 and
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation to yield \(10 \%\). The bonds pay \(9 \%\) interest, payable on a semiannual basis each July 1 and
A portfolio of investments of available-for-sale securities held by Dow Inc. is as follows.The Fair Value Adjustment account had a \(\$ 0\) balance on January 1, 2020. No sales or purchases took
On December 31, 2020, Banff Company held an investment in Glacier Inc. bonds with an original cost of \(\$ 23,000\). The investment was classified as an available-for-sale security, had a fair value
On November 1, 2020, Drucker Co. acquired the following investments in equity securities measured at FV-NI.Kelly Corporation-500 shares of common stock (no-par) at \(\$ 60\) per share.Keefe
On November 1, 2020, Drucker Co. acquired the following investments in equity securities measured at FV-NI.Kelly Corporation- 500 shares of common stock (no-par) at \(\$ 60\) per share.Keefe
On September 1, 2020, Tech Company purchased 2,000 shares of common stock of Eagle Inc. for \(\$ 200,000\), while not obtaining significant influence over Eagle Inc. On November 1, 2020, Tech Company
At December 31, 2019, the portfolio of investments in equity securities measured at FV-NI held by Athletes Inc. is as follows. Investment Security Badger Common Stock (1,000 shares) Spartan Common
On June 1, 2020, Athletes Inc. sold 400 shares of Spartan stock for \(\$ 33\) per share and 100 shares of Wildcat stock for \(\$ 55\) per share. Athletes Inc. purchased 400 shares of Gopher common
At December 31, 2019, the portfolio of investments in equity securities measured at FV-NI held by Athletes Inc. is as follows. Investment Security Badger Common Stock (1,000 shares) Spartan Common
On June 1, 2020, Athletes Inc. sold 400 shares of Spartan stock for \(\$ 33\) per share and 100 shares of Wildcat stock for \(\$ 55\) per share. Athletes Inc. purchased 400 shares of Gopher common
Five separate scenarios of equity investment holdings, measured at FV-NI are as follows.Required For each of the five separate scenarios, record the adjustment to fair value required on December 31,
Corporation completed the following transactions, in the order given, relative to the portfolio of stocks held as equity investments measured at FV-NI.Year 2020 1. Purchased 150 shares of Starbux
On January 1, 2020, Allen Corporation purchased \(30 \%\) of the 30,000 outstanding common shares of Towne Corporation at \(\$ 17\) per share as a long-term investment. On the date of purchase, the
Assume that Fleetwood Inc. purchased 40\% of the voting stock of Mac Corporation on January 1, 2020, for \(\$ 100,000\), an amount equal to \(40 \%\) of Mac's book value. Assume that the fair value
On January 1, 2020, Allen Corporation purchased \(30 \%\) of the 30,000 outstanding common shares of Towne Corporation at \(\$ 15\) per share as a long-term investment. On the date of purchase, the
On January 1, 2020. Case Corporation purchased 3,000 of the 10,000 outstanding shares of common stock of Dow Corporation for \(\$ 28,000\) cash. At that date, Dow's balance sheet reflected the
On July 1, 2020, Allen Corporation purchased \(30 \%\) of the 30,000 outstanding common shares of Towne Corporation at \(\$ 17\) per share as a long-term investment. On the date of purchase, the book
Atlanta Inc. holds an HTM bond investment in Falcons Corporation. The carrying value of the investment is \(\$ 140,500\) on December 31, 2020. Atlanta Inc. determines the present value of the amounts
Eagle Software has an equity investment in Finch Enterprises accounted for under the equity method. The carrying value of the investment was \(\$ 45,000\) on December 31, 2020. At December 31, 2020,
Atlanta Inc. holds an AFS bond investment in Falcons Corporation. The amortized cost of the investment is \(\$ 140,500\) on December 31, 2020. Atlanta Inc. estimates the fair value of the bonds to be
On January 1, 2020, Josie Inc. purchased for cash ten, \(\$ 1,000,4 \%\) bonds of Star Corp. at par. The bond interest is paid annually on January 1 of each year, and the bonds mature on January 1,
On October 31, 2020, West Company purchased \(\$ 10,000\) of East Company bonds. West Company plans to hold the bonds for an indefinite period of time. West Company elects to account for the debt
Assume that Fireside Inc. purchased \(30 \%\) of the common stock of Theater Supplies Corporation on January 1, 2020 , for \(\$ 100,000\). Fireside Inc. elected to account for its investment using
Provide the definition of a current liability.
Explain how the measurement of a liability is related to its cause.
Why are most current liabilities recognized at maturity value at the beginning of their term?
Compute the present value of a \(\$ 10,000\), one-year note payable that specifies no interest, although \(10 \%\) would be a realistic rate. Is the present value less than, greater than, or equal to
In evaluating a balance sheet, some creditors say the liability section is one of the most important sections. What are some reasons justifying this position?
Some liabilities are reported at their maturity amount. In general, when should liabilities, prior to the maturity date, be reported at less than their maturity amount?
Explain why the amount of cash salaries paid to employees does not equal salaries expense for the employer.
Differentiate between secured and unsecured liabilities. Explain the reporting procedures for each.
What are examples of secured and unsecured liabilities?
Distinguish between the stated rate and the market rate on a debt.
Briefly define the following terms related to a note payable: present value of the note and maturity value of the note.
Distinguish between an interest-bearing note and a noninterest-bearing note.
Assume that \(\$ 4,000\) cash is borrowed on a \(\$ 4,000,10 \%\), one-year note payable that is interest-bearing and that another \(\$ 4,000\) cash is borrowed on a \(\$ 4,400\) one-year note that
How is gift card breakage recognized as revenue using the proportional method?
Why is deferred revenue classified as a liability?
What is a compensated absence? When should the expense related to compensated absences be recognized?
What is the accounting definition of a contingency? What are the three characteristics of a contingency? Why is this concept important?
How is the likelihood of the outcome of a contingency measured? In general, how does this affect the accounting for and reporting of contingencies?
Briefly explain the accounting and reporting for loss contingencies.
What costs are recognized for environmental obligations?
Under what conditions may a debt due within the next year (as measured at year-end) be reported as a noncurrent liability? Under what conditions may a long-term debt (as measured at year-end) be
Define a security. Distinguish between debt and equity securities.
Briefly describe the methods to account for debt investments. How does an investor determine the appropriate accounting method to follow?
On July 1,2020 , Baker Company purchased \(\$ 50,000\) of LoCal Company \(6 \%\) bonds at par value. The bonds pay interest semiannually on July 1 and January 1. At December 31, 2020, the bonds have
If an investor holds an equity security investment where the investor does not exert significant influence, explain the appropriate accounting for the investment.
What accounts are affected by a sale of a debt security classified as HTM?
What is the most significant difference in the accounting treatment of an available-for-sale debt security compared to a trading debt security?
Explain the basic features of the equity method of accounting for long-term investments. When is the equity method applicable?
Why is the equity method sometimes called the one-line consolidation method?
How would an investor typically report a dividend declared by a company in which it holds a \(40 \%\) voting interest? A \(10 \%\) voting interest?
Indicate reasons why a 30\% ownership interest in another company may not be considered significant.
When are unrealized holding gains and losses on debt securities included in the determination of net income? When are unrealized holding gains and losses on equity securities included in the
Describe the balance sheet categorization and valuation within the asset section when an investment in securities is classified asa. Trading debt securities.d. Equity securities measured at FV-NI.b.
What is the financial statement impact when an investment is reclassified from a trading debt security to an available-for-sale debt security? When an available-for-sale debt security is reclassified
Explain when the fair value option of accounting for equity investments is applicable. What is the financial statement impact of accounting for investments under the fair value option?
What approach(es) are used to analyze impairment on available-for-sale and held-to-maturity debt securities?
On January 1,2020 , Sharp Company purchased \(\$ 50,000\) of Sox Company \(6 \%\) bonds, at a time when the market rate was \(5 \%\). The bonds mature on December 31, 2024, and pay interest annually
On January 1, 2020, Sharp Company purchased \(\$ 50,000\) of Sox Company \(5 \%\) bonds, at a time when the market rate was \(6 \%\). The bonds mature on December 31, 2024, and pay interest
Henry Inc. purchased \(\$ 5,000\) of Container Corporation's \(5 \%\) bonds at par. The purchase is made on January 1 , 2020, and the investment is classified as a trading security. At June 30, 2020,
Referring to information in Brief Exercise 14-18, assume that Henry Inc. sold its holdings of Container Corporation bonds on July 2, 2020, for \(\$ 4,800\).a. Record the sale of the debt
Referring to information in Brief Exercise 14-18, assume that Henry Inc. sold its holdings of Container Corporation bonds on July 2, 2020, for \(\$ 4,800\). Record the sale of the debt investment,
Assume the same facts as in Brief Exercise 14-16, except that Sharp Company does not intend to trade the bonds or to hold them until maturity.a. Prepare the entry for the purchase of the debt
Tracking Co. holds an AFS bond investment in Fields Corp. The carrying value of the investment is \(\$ 4,500\) at December 31, 2020. Tracking Co. determines the fair value of the investment at the
The following information relates to an AFS security investment held by Gomez Inc.Provide the journal entry to adjust the investment to fair value on December 31, 2020. Fair value. Carrying value
Turbo Corporation had net income of \(\$ 30,000\) and other comprehensive income of \(\$ 0\) prior to the following two adjustments: Turbo Corporation discovered it has an unrealized holding loss of
Phelps Company reported the following amounts this past year.- Revenues, \(\$ 50,000\).- Expenses, \(\$ 30,000\).- Realized loss on sale of AFS debt investments, \(\$ 5,000\).- Reclassification
An investor purchased 100 shares of Mallard common stock at \(\$ 20\) per share on March 15, 2020. On December 31, 2020, the stock was quoted at \(\$ 19\) per share and declared and paid a dividend
An investor purchased 100 shares of Mallard common stock at \(\$ 20\) per share on March 15, 2020. On December 31, 2020, the stock was quoted at \(\$ 19\) per share and declared and paid a dividend
Lance Co. purchased 100 shares of Mallard common stock at \$20 per share on March 15, 2020. Mallard declared and paid a dividend of \(\$ 1.50\) per share in 2020. The market price on December 31,
On December 31, 2020, Raven Company's portfolio of equity securities was valued at \(\$ 1,800\). The original cost of the investments in the portfolio was \(\$ 1,600\). Raven does not have
On January 1, 2020, Evergreen Inc. purchased 3,750 of the 15,000 outstanding shares of common stock of Nature Net Inc. obtaining significant influence of the company. The shares were purchased for
On January 1, 2020, Hockey Unlimited Inc. purchased 2,500 of the 10,000 outstanding common shares of Goal Corporation for \(\$ 14,000\) cash obtaining significant influence of the company. Hockey
Clarkson Inc. purchased \(10 \%\) of the 10,000 shares of common stock in Nashville Inc. for \(\$ 40,000\) in January 2020. Shelton Inc. purchased 35\% of the 10,000 shares of common stock in
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