All possible journal entries:
Allowance for Credit Loss
Cash
Credit Loss
Discount on Bond
Dividend receivable
Dividend revenue
Equity in earnings of XYZ
Fair Value Adjustment
Interest Revenue
Investment in Bond
Investment in XYZ common stock
Loss on Impairment (NI)
Premium on Bond
Realized Gain on Sale of Bond
Realized Gain on Sale of Stock
Realized Loss on Sale of Bond
Reclassification Adjustment- OCI
Unrealized Holding Gain- NI
Unrealized Holding Gain- OCI
Unrealized Holding Loss- NI
Unrealized Holding Loss- OCI
1 Problem 1 [discount, temporary impairment, HTM] 2 On June 30, 2020 ABC purchased $500,000 par value bonds dated June 30, 2020 at a purchase price of 3 $462,806. The coupon rate on the bonds is 5% per year and the purchase price of the bonds yield an 4 effective rate of 6% per year. The bonds pay interest semiannually on June 30 and December 31st and 5 mature on June 30, 2030. The fiscal year of ABC ends on December 31st. The fair market value of the 6 bonds on December 31, 2020 was 450,000. ABC received the December 31 interest payment on 7 December 31, 2020. ABC classifies the bonds as Held-To-Maturity. ABC does not intend to sell the bonds and it is highly unlikely that circumstances will force the company to sell the bonds before the market price of the bonds recover. None of the bond impairment is due to a 10 deterioration in the credit worthiness of the issuer. 11 All questions below pertain to the accounting for the investment by ABC. 8 9 12 13 14 15 16 1. Prepare all journal entries related to the bond investment that is necessary for ABC to issue GAAP 17 compliant financial statements for the year ended December 31, 2020. 18 19 Enter your answer below. Choose the account from the drop-down list in the yellow cell. Enter the amount of the entry in the green box. 20 Entry to record purchase of bond on 6/30/2020: 21 22 Account Debit Credit 23 24 PPP 25 26 27 Entries at 12/31/2020: 28 29 Account 30 Debit Credit 2 31 2 32 2 33 2 34 2 35 36 2. What will be the post-adjustment December 31, 2020 amortized cost of the bond? 37 38 Enter your answer in the green box 3 41 42 3. What will be the post-adjustment December 31, 2020 balance in the Fair Value Adjustment account? 43 44 Enter your answer in the green box 4 45 46 4. What amount of interest revenue will be reported on the 2020 income statement? 47 50 5. What amount will be reported in the asset section of the December 31, 2020 balance sheet for 51 investment in bonds? 52 55 6. What amount of unrealized holding gain (if any) will be reported as a component of net income for the 56 year ended December 31, 2020? 57 60 7. What amount of unrealized holding gain (if any) will be reported as a component of other 61 comprehensive income for the year ended December 31, 2020? 62 63 Enter your answer in the green box 8 64 65 8. Assume that ABC sold the bonds on January 2, 2021 for $451,000. Prepare all entries to record the 66 sale. 67 68 Enter your answer below. Choose the account from the drop-down list in the yellow cell. Enter the amount of the entry in the green box. 69 Entry to record sale of bond on 1/2/2021: 70 Account Debit Credit 71 9 72 9 73 9 74 9 1 Problem 1 [discount, temporary impairment, HTM] 2 On June 30, 2020 ABC purchased $500,000 par value bonds dated June 30, 2020 at a purchase price of 3 $462,806. The coupon rate on the bonds is 5% per year and the purchase price of the bonds yield an 4 effective rate of 6% per year. The bonds pay interest semiannually on June 30 and December 31st and 5 mature on June 30, 2030. The fiscal year of ABC ends on December 31st. The fair market value of the 6 bonds on December 31, 2020 was 450,000. ABC received the December 31 interest payment on 7 December 31, 2020. ABC classifies the bonds as Held-To-Maturity. ABC does not intend to sell the bonds and it is highly unlikely that circumstances will force the company to sell the bonds before the market price of the bonds recover. None of the bond impairment is due to a 10 deterioration in the credit worthiness of the issuer. 11 All questions below pertain to the accounting for the investment by ABC. 8 9 12 13 14 15 16 1. Prepare all journal entries related to the bond investment that is necessary for ABC to issue GAAP 17 compliant financial statements for the year ended December 31, 2020. 18 19 Enter your answer below. Choose the account from the drop-down list in the yellow cell. Enter the amount of the entry in the green box. 20 Entry to record purchase of bond on 6/30/2020: 21 22 Account Debit Credit 23 24 PPP 25 26 27 Entries at 12/31/2020: 28 29 Account 30 Debit Credit 2 31 2 32 2 33 2 34 2 35 36 2. What will be the post-adjustment December 31, 2020 amortized cost of the bond? 37 38 Enter your answer in the green box 3 41 42 3. What will be the post-adjustment December 31, 2020 balance in the Fair Value Adjustment account? 43 44 Enter your answer in the green box 4 45 46 4. What amount of interest revenue will be reported on the 2020 income statement? 47 50 5. What amount will be reported in the asset section of the December 31, 2020 balance sheet for 51 investment in bonds? 52 55 6. What amount of unrealized holding gain (if any) will be reported as a component of net income for the 56 year ended December 31, 2020? 57 60 7. What amount of unrealized holding gain (if any) will be reported as a component of other 61 comprehensive income for the year ended December 31, 2020? 62 63 Enter your answer in the green box 8 64 65 8. Assume that ABC sold the bonds on January 2, 2021 for $451,000. Prepare all entries to record the 66 sale. 67 68 Enter your answer below. Choose the account from the drop-down list in the yellow cell. Enter the amount of the entry in the green box. 69 Entry to record sale of bond on 1/2/2021: 70 Account Debit Credit 71 9 72 9 73 9 74 9
