Intermediate Accounting I
In-Class Problems for Chapter 17
SOLUTION
1. On July 1, 2020, Salt Mine Corporation purchased at par 8% bonds having a maturity
value of $250,000. The bonds are dated July 1, 2020, and mature July 1, 2025, with
interest payable on July 1 of each year. The bonds are classified in the held-to-
maturity category, and the company does not use reversing entries.
Instructions:
a. Prepare the journal entry at the date of the bond purchase.
b. Prepare the journal entry to record the interest earned and interest received for
2020.
c. Prepare the journal entries to record the interest earned and interest received for
2021.
July 1, 2020
Debt Investments (Held-to-Maturity) 250,000
Cash 250,000
December 31, 2020
Interest Receivable ($250,000 x 8% x 6/12) 10,000
Interest Revenue 10,000
July 1, 2021
Cash ($250,000 x 8%) 20,000
Interest Revenue 10,000*
Interest Receivable ($250,000 x 8% x 6/12) 10,000
December 31, 2021
Interest Receivable 10,000
Interest Revenue ($250,000 x 8% x 6/12) 10,000
1
2. On January 1, 2020, Hummer Company purchased 5% bonds, having a maturity
value of $500,000, for $428,938. The bonds provide the bondholders with a 7% yield.
They are dated January 1, 2020, and mature January 1, 2030, with interest receivable
June 30 and December 31 of each year. Hummer Company uses the effective-interest
method to allocate unamortized discount or premium. The bonds are classified as
available-for-sale. The fair value of the bonds at December 31 of each year end is
$430,000, $425,000, $420,000, $450,000, and $470,000 in 2020 through 2024,
respectively.
Instructions:
a) Prepare the journal entry at the date of the bond purchase.
b) Prepare the journal entries to record the interest earned and recognition of fair
value for 2020.
c) Prepare the journal entry to record the recognition of fair value for 2021.
a)
January 1, 2020
Debt Investments (Available-for-Sale) 428,938
Cash 428,938
b)
Schedule of Interest Revenue and Bond Amortization Schedule
Effective Interest Method
5% Bonds Sold to Yield 7%
Carrying
Discount Amount of
Date Cash Received Interest Revenue Amortization Bonds
1/1/20 - - - $428,938
6/30/20 $12,500 $15,013 $2,513 $431,451
12/31/20 12,500 15,101 2,601 434,052
6/30/21 12,500 15,192 2,692 436,744
12/31/21 12,500 15,286 2,786 439,530
June 30, 2020
Cash 12,500
Debt Investments (Available-for-Sale) 2,513
Interest Revenue 15,013
December 31, 2020
Cash 12,500
Debt Investments (Available-for-Sale) 2,601
Interest Revenue 15,101
Unrealized Holding Gain or Loss – Equity 4,052
2
($430,000 - $434,052)
Fair Value Adjustment (Available-for-Sale) 4,052
c)
December 31, 2021
Unrealized Holding Gain or Loss – Equity 10,478
Fair Value Adjustment (Available-for-Sale) 10,478
Unrealized Holding
Cost Fair Value Gain (Loss)
Available-for-Sale Bonds $439,530 $425,000 $(14,530)
Previous securities fair value
adjustment – Cr. (4,052)
Fair value adjustment – Cr. $(10,478)
3
3. On December 31, 2020, InterSteel Inc. provided you with the following information
regarding its equity securities:
December 31, 2020
Investments Cost Fair Value
JAK Inc. stock $40,000 $46,000
Kibby Co. stock 101,000 99,500
Lorton Corp. stock 31,000 34,500
Total of portfolio $172,000 $180,000
All of the securities were purchased during 2020. During 2021, InterSteel sold its
Lorton Corp. stock for $33,200. The fair value of the stock on December 31, 2021,
was: JAK Inc. stock—$47,600; Kibby Co. stock—$95,400. None of the equity
investments result in significant influence.
Instructions:
a) Prepare the adjusting journal entry needed on December 31, 2020.
b) Prepare the journal entry to record the sale of the Lorton Corp. stock during 2021.
c) Prepare the adjusting journal entry needed on December 31, 2021.
a)
December 31, 2020
Fair Value Adjustment ($180,000 - $172,000) 8,000
Unrealized Holding Gain or Loss – Income 8,000
b)
During 2021
Cash 32,000
Gain on Sale of Investments 2,200
Equity Investments 31,000
c) At December 31, 2021:
Investments Cost Fair Value Unrealized
Gain (Loss)
JAK Inc. stock $40,000 $47,600 $7,600
Kibby Co. stock 101,000 95,400 (5,600)
Total of portfolio $141,000 $143,000 2,000
Previous securities fair value
adjustment balance – Dr. 8,000
Fair value adjustment – Cr. $($6,000)
4
Unrealized Holding Gain or Loss – Income 6,000
Fair Value Adjustment 6,000
5
4. On January 1, 2020, LabTech Inc. purchased 40% of the common shares of
UnderTech Company for $280,000. During the year, UnderTech earned net income of
$120,000 and paid dividends of $36,000.
Instructions:
Prepare the entries for LabTech to record the purchase and any additional entries
related to this investment in UnderTech Company in 2020.
Equity Investments (UnderTech Stock) 280,000
Cash 280,000
Cash ($36,000 x 40%) 14,400
Equity Investments (UnderTech Stock) 14,400
Equity Investments (UnderTech Stock) 48,000
Investment Income (40% x $120,000) 48,000