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Connect Intermediate Accounting Chapter 12
Q1. Lance Brothers Enterprises acquired $720,000 of 3% bonds, dated July 1, on July 1, 2018, as a long-term investment. Management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Lance Brothers paid $600,000 for the investment in bonds and will receive interest semiannually on June 30 and December 31.
Prepare the journal entries (a) to record Lance Brothers’ investment in the bonds on July 1, 2018, and (b) to record interest on December 31, 2018, at the effective (market) rate. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)
Q2. S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2018, S&L purchased Coca-Cola bonds at par for $875,000 and sold the bonds on January 3, 2019, for $880,000. At December 31, the bonds had a fair value of $873,000.
What pretax amounts did S&L include in its 2018 and 2019 net income as a result of this investment (ignoring interest)?
Q3. S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2018, S&L purchased Coca-Cola bonds at par for $875,000 and sold the bonds on January 3, 2019, for $880,000. At December 31, the bonds had a fair value of $873,000.
Prepare journal entries to record (a) any unrealized gains or losses occurring in 2018 and (b) the sale of the bonds in 2019. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)
Q4. S&L Financial buys and sells securities which it classifies as available-for-sale. On December 27, 2018, S&L purchased Coca-Cola bonds at par for $875,000 and sold the bonds on January 3, 2019, for $880,000. At December 31, the bonds had a fair value of $873,000, and S&L has the intent and ability to hold the investment until fair value recovers.
What pretax amounts did S&L include in its 2018 and 2019 net income as a result of this investment?
Q5. S&L Financial buys and sells securities which it classifies as available-for-sale. On December 27, 2018, S&L purchased Coca-Cola bonds at par for $875,000 and sold the bonds on January 3, 2019, for $880,000. At December 31, the bonds had a fair value of $873,000, and S&L has the intent and ability to hold the investment until fair value recovers.
Prepare journal entries to record (a) any unrealized gains or losses occurring in 2018 and (b) the sale of the bonds in 2019, including recognition of any unrealized gains in 2019 prior to sale and reclassification of amounts out of OCI. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)
Q6. S&L Financial buys and sells securities that it typically classifies as available-for-sale. On December 27, 2018, S&L purchased Coca-Cola bonds at par for $875,000 and sold the bonds on January 3, 2019, for $880,000. At December 31, the bonds had a fair value of $873,000. When it purchased the Coca-Cola bonds, S&L Financial decided to elect the fair value option for this investment.
What pretax amounts did S&L include in its 2018 and 2019 net income as a result of this investment (ignoring interest)?
Q7. For several years Fister Links Products has held Microsoft bonds, considered by the company to be securities available-for-sale. The bonds were acquired at a cost of $500,000. At the end of 2018, their fair value was $610,000 and their amortized cost was $510,000. At the end of 2019, their fair value was $600,000 and their amortized cost was $520,000.
At what amount will the investment be reported in the December 31, 2019, balance sheet? What adjusting entry is required to accomplish this objective (ignore interest)?
Q8. Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 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, 2018, was $210 million.
Required:
1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Tanner-UNF report its investment in the December 31, 2018, 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, 2019, for $190 million. Prepare the journal entry to record the sale.
Q9. Mills Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Company management has positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $280 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, 2018, was $270 million.
Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2018, 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, 2019, for $290 million. Prepare the journal entry to record the sale.
Q10.
FF&T Corporation is a confectionery wholesaler that frequently buys and sells securities to meet various investment objectives. The following selected transactions relate to FF&T’s investment activities during the last two months of 2018. At November 1, FF&T held $48 million of 20-year, 10% bonds of Convenience, Inc., purchased May 1, 2018, at face value. Management has the positive intent and ability to hold the bonds until maturity. FF&T’s fiscal year ends on December 31.
| Nov.1 | Received semiannual interest of $2.4 million from the Convenience, Inc., bonds. |
| Dec.1 | Purchased 12% bonds of Facsimile Enterprises at their $30 million face value, to be held until they mature in 2024. Semiannual interest is payable May 31 and November 30. |
| Dec.31 | Purchased U.S. Treasury bills to be held until they mature in two months for $8.9 million. |
| Dec.31 | Recorded any necessary adjusting entry(s) relating to the investments. |
The fair values of the investments at December 31 were:
| Convenience bonds | $44.7million |
| Facsimile Enterprises bonds | $30.9million |
| U.S. Treasury bills | $8.9million |
Required:
Prepare the appropriate journal entry for each transaction or event. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)
Q11. Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 million for the bonds. The company will receive interest semiannually on June 30 and December 31. Company management is holding the bonds in its trading portfolio. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $210 million.
Required:
1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2018, 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, 2019, for $190 million. Prepare the journal entries to record the sale.
Q12. Mills Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $280 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, 2018, was $270 million.
Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2018, 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, 2019, for $290 million. Prepare the journal entries to record the sale.
Q13.
At December 31, 2018, Hull-Meyers Corp. had the following investments that were purchased during 2018, its first year of operations:
| Cost | Fair Value | |
| Trading Securities: | ||
| Security A | $900,000 | $910,000 |
| Security B | 105,000 | 100,000 |
| Totals | $1,005,000 | $1,010,000 |
| Securities Available-for-Sale: | ||
| Security C | $700,000 | $780,000 |
| Security D | 900,000 | 915,000 |
| Totals | $1,600,000 | $1,695,000 |
| Securities to Be Held-to-Maturity: | ||
| Security E | $490,000 | $500,000 |
| Security F | 615,000 | 610,000 |
| Totals | $1,105,000 | $1,110,000 |
No investments were sold during 2018. All securities except Security D and Security F are considered short-term investments. None of the fair value changes is considered permanent.
Required:
Compute the below table to calculate the following. (Amounts to be deducted should be indicated with a minus sign.)
Q14. Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $80 million of 8% bonds, dated January 1, on January 1, 2018. Management intends to include the investment in a short-term, active trading portfolio. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $66 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2018, was $70 million.
Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet?
4-b. Prepare any entry necessary to achieve this reporting objective.
5. How would Fuzzy Monkey’s 2018 statement of cash flows be affected by this investment?
Q15. Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2018. Management intends to have the investment available for sale when circumstances warrant. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $66 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2018, was $70 million.
Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet?
4-b. Prepare the entry necessary to achieve this reporting objective.
5. How would Fuzzy Monkey’s 2018 statement of cash flows be affected by this investment?
Q16.
Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division. From time to time the company buys and sells securities. The following selected transactions relate to Amalgamated’s investment activities during the last quarter of 2018 and the first month of 2019. The only securities held by Amalgamated at October 1 were $30 million of 10% bonds of Kansas Abstractors, Inc., purchased on May 1 at face value and held in Amalgamated’s trading portfolio. The company’s fiscal year ends on December 31.
| 2018 | ||
| Oct. | 18 | Purchased 2 million preferred shares of Millwork Ventures Company for $58 million. |
| 31 | Received semiannual interest of $1.5 million from the Kansas Abstractors bonds. | |
| Nov. | 1 | Purchased 10% bonds of Holistic Entertainment Enterprises at their $18 million face value, to be held until they mature in 2025. Semiannual interest is payable April 30 and October 31. |
| 1 | Sold the Kansas Abstractors bonds for $28 million because rising interest rates are expected to cause their fair value to continue to fall. No unrealized gains and losses had been recorded on these bonds previously. | |
| Dec. | 1 | Purchased 12% bonds of Household Plastics Corporation at their $60 million face value, to be held until they mature in 2028. Semiannual interest is payable May 31 and November 30. |
| 20 | Purchased U. S. Treasury bonds for $5.6 million as trading securities, hoping to earn profits on short-term differences in prices. | |
| 21 | Purchased 4 million common shares of NXS Corporation for $44 million, planning to earn profits from dividends or gains if prevailing market conditions encourage sale. | |
| 23 | Sold the Treasury bonds for $5.7 million. | |
| 29 | Received cash dividends of $3 million from the Millwork Ventures Company preferred shares. | |
| 31 | Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Millwork Ventures Company preferred stock was $27.50 per share and $11.50 per share for the NXS Corporation common. The fair values of the bond investments were $58.7 million for Household Plastics Corporation and $16.7 million for Holistic Entertainment Enterprises. |
| 2019 | ||
| Jan. | 7 | Sold the NXS Corporation common shares for $43 million. |
Required:
Prepare the appropriate journal entry for each transaction or event. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field. Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)
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