Chapter 12, Assignment 1 1. Which of the following statements about investments in bonds are true? (Select all that apply.) a. If the stated rate is higher than the market rate, investors will purchase the bond at a discount. b. If the stated rate is higher than the market rate, investors will purchase the bond at a premium. C. The investor values that stream of future cash flows based on the stated rate of the bond. d. The purchase price of a bond security is determined by computing the present value of the related stream of cash flows. Knowledge Check 01 If the interest rate paid by the bond (the stated rate) is higher than the market rate, investors are willing to purchase the bond for more than its maturity value (so it's sold at a premium). On the other hand, if the bond's stated rate is lower than the market rate, then investors are willing to purchase the bond only at an amount less than its maturity value (so it's sold at a discount). The purchase price of a bond security is determined by computing the present value of the related stream of cash flows. The investor values that stream of future cash flows based on the prevailing market interest rate for debt of similar risk and maturity at the time the investor purchases the bond. 2. Which of the following statements about the accounting for debt investments are true? (Select all that apply.) a. When debt investments are purchased, they are recorded at cost. b. If a company purchases bonds for an amount that's less than their face amount it credits Discount on bond investment for the difference. c. When the effective interest method is used, the effective interest (or interest revenue) for each period equals the stated rate of interest multiplied by the outstanding balance of the debt at the beginning of the period. d. The amortization of the discount gradually decreases the amortized cost of an investment in bonds purchased at a discount. Knowledge Check 01 When debt investments are purchased, they are recorded at cost that is, the total amount paid for the investment, including any brokerage fees. If a company purchases bonds for an amount that's less than their face amount it credits Discount on bond investment for the difference. Discount on bond investment is a contra-asset to the investment account that serves to reduce the carrying value of the investment to its cost at the date of purchase. The effective interest (or interest revenue) for each period equals the market rate of interest when the debt was purchased multiplied by the outstanding balance of the debt at the beginning of the period. The stated rate is used to determine each period's cash interest The amortization of the discount gradually increases the amortized cost of the investment, until the investment reaches its principal amount, which is the amount to be received when the debt matures. 3. Match each classification of debt investments with the treatment of unrealized holding gains and losses by using the pull-down menus. Recognized in other comprehensive 1. Available-for-sale income Held-to-maturity (fair value option not Not recognized 2. elected) 3. Trading Securities Recognized in net income Explanation: 1. Unrealized holding gains and losses on available-for-sale securities are recognized in other comprehensive Income, and therefore in accumulated other comprehensive income in shareholders' equity. 2. Unless the investor elects the fair value option, unrealized holding gains and losses on held-to-maturity Investments are not recognized on debt investments that are held to-maturity. 3. Unrealized holding gains and losses on trading securities are recognized In not Income, and therefore in retained earnings as part of shareholders' equity January 1, Year 1, Broglie Company purchased $922.000 of bonds issued Caro Company at face value. Broglie had the positive intent and ability to securities to maturity. On December 31. Year 1. those bonds had a fair value $950,000. That change in fair value was deem al change in fair value was deemed to be temporary. Due to a change circumstances, Broglie sold those bonds for $976,000 on March 1, Year 2. W amount of the gain that will be reported in net income for Year 2? Securities pany at face value. Bol pany purchased $922,000 of bonds issued by ent and ability to hold debt Net income $54,000 Explanation: Since the bonds were purchased at face value, there is no discount or premium to amortize. Also, the change in fair value at December 31. Year 1 was temporary and therefore can be ignored. Sales price Less: Face value Realized gain $976,000 922,000 $ 54,000 References Chapter 12, Assignment 2 5. Tanner-UNF Corporation acquired as a long-term investment $150 million of 4.0% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (vield) was 6% for bonds of similar risk and maturity. Tanner-UNF paid $120.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021. was $130.0 million. Required: 1. & 2. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective market rate 3. At what amount will Tanner-UNF report its investment in the December 31, 2021 balance sheet? 4. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $100.0 million Prepare the journal entry to record the sale. 6. Mills Corporation acquired as a long-term investment $245 million of 8% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $280.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021. was $260.0 million. Required: 1. & 2. Prepare the journal entry to record Mills'investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate. 3. At what amount will Mills report its investment in the December 31, 2021, balance sheet? 4. Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2022, for $295 million. Prepare the journal entry to record the sale. 7. Tanner-UNF Corporation acquired as an investment $230 million of 8% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 10% for bonds of similar risk and maturity, Tanner-UNF paid $210 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $220 million Required: 1. & 2. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1.2021 and interest on December 31, 2021, at the effective (market) rate. 3. Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2021, balance sheet. 4. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $200 million. Prepare the journal entries required on the date of sale. 8. Loreal-American Corporation purchased several marketable securities during 2021 At December 31, 2021, the company had the investments in bonds listed below. None was held at the last reporting date, December 31, 2020, and all are considered securities available-for-sale. Unrealized Holding Cost Fair Value Gain (Loss) Short term: Blair, Inc. $ 520,000 $ 385,000 $ (135,000) ANC Corporation 470,000 520,000 50,000 Totals $ 990,000 $ 905,000 $ (85,000) Long term: Drake Corporation $ 520,000 $ 580,000 $ 60,000 Aaron Industries 700,000 680,000 (20,000) Totals $1,220,000 $1,260,000 $ 40,000 Required: 1. Prepare appropriate adjusting entries at December 31, 2021. 2. What amounts would be reported in the income statement at December 31, 2021, as a result of the adjusting entry? 9. Colah Company purchased $2.3 million of Jackson, Inc., 6% bonds at par on July 1 2021, with interest paid semi-annually. Colah determined that it should account for the bonds as an available-for-sale investment. At December 31, 2021, the Jackson bonds had a fair value of $2.63 million. Colah sold the Jackson bonds on July 1, 2022 for $2,070,000 Required: 1. Prepare Colah's journal entries for above transactions. a. The purchase of the Jackson bonds on July 1. b. Interest revenue for the last half of 2021. c. Any year-end 2021 adjusting entries. d. Interest revenue for the first half of 2022. e. Any entries necessary upon sale of the Jackson bonds on July 1, 2022. Including updating the fair value adjustment, recording any reclassification adjustment, and recording the sale. 2. Complete the following table to show the effect of the Jackson bonds on Colah's not income, other comprehensive income, and comprehensive income for 2021 2022 and cumulatively over 2021 and 2022. The following information applies to the questions displayed below.] The accounting records of Jamaican Importers, Inc., at January 1, 2021, included the following: Assets: Investment in IBM common shares $1,995,000 Less: Fair value adjustment (210,000 $1,785,000 No changes occurred during 2021 in the investment portfolio. Required: 10. Prepare appropriate adjusting entry(s) at December 31, 2021, assuming the fair Value of the IBM common shares was: $1,359,000 (If no entry is required for a transaction/event, select "No journal entry required in the first account field.) 11. Prepare appropriate adjusting entry(s) at December 31, 2021, assuming the fair value of the IBM common shares was: $1.810,000 (if no entry is required for a transaction/event, select "No journal entry required in the first account field.) 12. Prepare appropriate adjusting entry(s) at December 31, 2021, assuming the fair value of the IBM common shares was: $2,010,000 (If no entry is required for a transaction/event, select "No journal entry required in the first account field 13. As a long-term investment at the beginning of the 2021 fiscal year, Florists International purchased 25% of Nursery Supplies Inc.'s 20 million shares for $61 million. The fair value and book value of the shares were the same at that time. During the year, Nursery Supplies earneu net income of $44 million and distributed cash dividends of $1.40 per share. At the end of the year, the fair value of the shares is $57 million. Required: Prepare the appropriate journal entries from the purchase through the end of the year. (If no entry is required for a transaction/event, select "No lournal entry required" in the first account field. Enter your answers in millions, (i.e., 10,000,000 should be entered as 10).) Chapter 12, Assignment 1 1. Which of the following statements about investments in bonds are true? (Select all that apply.) a. If the stated rate is higher than the market rate, investors will purchase the bond at a discount. b. If the stated rate is higher than the market rate, investors will purchase the bond at a premium. C. The investor values that stream of future cash flows based on the stated rate of the bond. d. The purchase price of a bond security is determined by computing the present value of the related stream of cash flows. Knowledge Check 01 If the interest rate paid by the bond (the stated rate) is higher than the market rate, investors are willing to purchase the bond for more than its maturity value (so it's sold at a premium). On the other hand, if the bond's stated rate is lower than the market rate, then investors are willing to purchase the bond only at an amount less than its maturity value (so it's sold at a discount). The purchase price of a bond security is determined by computing the present value of the related stream of cash flows. The investor values that stream of future cash flows based on the prevailing market interest rate for debt of similar risk and maturity at the time the investor purchases the bond. 2. Which of the following statements about the accounting for debt investments are true? (Select all that apply.) a. When debt investments are purchased, they are recorded at cost. b. If a company purchases bonds for an amount that's less than their face amount it credits Discount on bond investment for the difference. c. When the effective interest method is used, the effective interest (or interest revenue) for each period equals the stated rate of interest multiplied by the outstanding balance of the debt at the beginning of the period. d. The amortization of the discount gradually decreases the amortized cost of an investment in bonds purchased at a discount. Knowledge Check 01 When debt investments are purchased, they are recorded at cost that is, the total amount paid for the investment, including any brokerage fees. If a company purchases bonds for an amount that's less than their face amount it credits Discount on bond investment for the difference. Discount on bond investment is a contra-asset to the investment account that serves to reduce the carrying value of the investment to its cost at the date of purchase. The effective interest (or interest revenue) for each period equals the market rate of interest when the debt was purchased multiplied by the outstanding balance of the debt at the beginning of the period. The stated rate is used to determine each period's cash interest The amortization of the discount gradually increases the amortized cost of the investment, until the investment reaches its principal amount, which is the amount to be received when the debt matures. 3. Match each classification of debt investments with the treatment of unrealized holding gains and losses by using the pull-down menus. Recognized in other comprehensive 1. Available-for-sale income Held-to-maturity (fair value option not Not recognized 2. elected) 3. Trading Securities Recognized in net income Explanation: 1. Unrealized holding gains and losses on available-for-sale securities are recognized in other comprehensive Income, and therefore in accumulated other comprehensive income in shareholders' equity. 2. Unless the investor elects the fair value option, unrealized holding gains and losses on held-to-maturity Investments are not recognized on debt investments that are held to-maturity. 3. Unrealized holding gains and losses on trading securities are recognized In not Income, and therefore in retained earnings as part of shareholders' equity January 1, Year 1, Broglie Company purchased $922.000 of bonds issued Caro Company at face value. Broglie had the positive intent and ability to securities to maturity. On December 31. Year 1. those bonds had a fair value $950,000. That change in fair value was deem al change in fair value was deemed to be temporary. Due to a change circumstances, Broglie sold those bonds for $976,000 on March 1, Year 2. W amount of the gain that will be reported in net income for Year 2? Securities pany at face value. Bol pany purchased $922,000 of bonds issued by ent and ability to hold debt Net income $54,000 Explanation: Since the bonds were purchased at face value, there is no discount or premium to amortize. Also, the change in fair value at December 31. Year 1 was temporary and therefore can be ignored. Sales price Less: Face value Realized gain $976,000 922,000 $ 54,000 References Chapter 12, Assignment 2 5. Tanner-UNF Corporation acquired as a long-term investment $150 million of 4.0% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (vield) was 6% for bonds of similar risk and maturity. Tanner-UNF paid $120.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021. was $130.0 million. Required: 1. & 2. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective market rate 3. At what amount will Tanner-UNF report its investment in the December 31, 2021 balance sheet? 4. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $100.0 million Prepare the journal entry to record the sale. 6. Mills Corporation acquired as a long-term investment $245 million of 8% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $280.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021. was $260.0 million. Required: 1. & 2. Prepare the journal entry to record Mills'investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate. 3. At what amount will Mills report its investment in the December 31, 2021, balance sheet? 4. Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2022, for $295 million. Prepare the journal entry to record the sale. 7. Tanner-UNF Corporation acquired as an investment $230 million of 8% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 10% for bonds of similar risk and maturity, Tanner-UNF paid $210 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $220 million Required: 1. & 2. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1.2021 and interest on December 31, 2021, at the effective (market) rate. 3. Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2021, balance sheet. 4. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $200 million. Prepare the journal entries required on the date of sale. 8. Loreal-American Corporation purchased several marketable securities during 2021 At December 31, 2021, the company had the investments in bonds listed below. None was held at the last reporting date, December 31, 2020, and all are considered securities available-for-sale. Unrealized Holding Cost Fair Value Gain (Loss) Short term: Blair, Inc. $ 520,000 $ 385,000 $ (135,000) ANC Corporation 470,000 520,000 50,000 Totals $ 990,000 $ 905,000 $ (85,000) Long term: Drake Corporation $ 520,000 $ 580,000 $ 60,000 Aaron Industries 700,000 680,000 (20,000) Totals $1,220,000 $1,260,000 $ 40,000 Required: 1. Prepare appropriate adjusting entries at December 31, 2021. 2. What amounts would be reported in the income statement at December 31, 2021, as a result of the adjusting entry? 9. Colah Company purchased $2.3 million of Jackson, Inc., 6% bonds at par on July 1 2021, with interest paid semi-annually. Colah determined that it should account for the bonds as an available-for-sale investment. At December 31, 2021, the Jackson bonds had a fair value of $2.63 million. Colah sold the Jackson bonds on July 1, 2022 for $2,070,000 Required: 1. Prepare Colah's journal entries for above transactions. a. The purchase of the Jackson bonds on July 1. b. Interest revenue for the last half of 2021. c. Any year-end 2021 adjusting entries. d. Interest revenue for the first half of 2022. e. Any entries necessary upon sale of the Jackson bonds on July 1, 2022. Including updating the fair value adjustment, recording any reclassification adjustment, and recording the sale. 2. Complete the following table to show the effect of the Jackson bonds on Colah's not income, other comprehensive income, and comprehensive income for 2021 2022 and cumulatively over 2021 and 2022. The following information applies to the questions displayed below.] The accounting records of Jamaican Importers, Inc., at January 1, 2021, included the following: Assets: Investment in IBM common shares $1,995,000 Less: Fair value adjustment (210,000 $1,785,000 No changes occurred during 2021 in the investment portfolio. Required: 10. Prepare appropriate adjusting entry(s) at December 31, 2021, assuming the fair Value of the IBM common shares was: $1,359,000 (If no entry is required for a transaction/event, select "No journal entry required in the first account field.) 11. Prepare appropriate adjusting entry(s) at December 31, 2021, assuming the fair value of the IBM common shares was: $1.810,000 (if no entry is required for a transaction/event, select "No journal entry required in the first account field.) 12. Prepare appropriate adjusting entry(s) at December 31, 2021, assuming the fair value of the IBM common shares was: $2,010,000 (If no entry is required for a transaction/event, select "No journal entry required in the first account field 13. As a long-term investment at the beginning of the 2021 fiscal year, Florists International purchased 25% of Nursery Supplies Inc.'s 20 million shares for $61 million. The fair value and book value of the shares were the same at that time. During the year, Nursery Supplies earneu net income of $44 million and distributed cash dividends of $1.40 per share. At the end of the year, the fair value of the shares is $57 million. Required: Prepare the appropriate journal entries from the purchase through the end of the year. (If no entry is required for a transaction/event, select "No lournal entry required" in the first account field. Enter your answers in millions, (i.e., 10,000,000 should be entered as 10).)