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ACCT.

3021 HW 1
Q: 12-2
Securities are investments in bonds that have a specified maturity date.
The bonds usually recorded at cost. Any investor who has the ability or
positive intends to hold the securities to maturity can be classified as
held-to-maturity. For the held-to-maturity investments we do not
recognize unrealized holding gains and losses, and they are reported on
the balance sheet at amortized cost.
BE: 1
LANCE BROTHERS ENTERPRISE.
Stated rate: 3% / 2 (semiannually) = 1.5%
Market Rate: 4% / 2 (semiannually)=2%
a)

CALCULATION OF THE PRICE OF THE BONDS

JOURNAL ENTRY JULY 1, 2013


Investment in Bonds (face amount)
Discount on bonds Investment
(difference)
Cash (price paid for the bonds)
b)

DEBIT
$ 720,000

CREDIT
$ 120,000
$ 600,000

Outstanding Balance
Effective rate 4%/2
Effective Interest
$ 600,000 x
2% **
=
$ 12,000
**Interest paid semiannually then: one-half the market rate would be
4%/2 = 2%
JOURNAL ENTRY DEC. 31 2013
DEBIT
CREDIT
Cash (stated rate x face amount)
$ 10,800
(1.5% x $ 720,000)
=
Discount on Bond Investment ($
12,000 - $ 10,800)
$ 1,200
=
Investment revenue (market
rate x outstanding balance) (2% x
$ 12,000
$600,000) =
The amortized cost of the investment now is $ 720,000 118,800*** =
$ 601,200
($120,000 $1,200) = 118,800***
E 12-1 Tanner UNF
Stated rate: 6% / 2 (semiannually) = 3%
Market Rate: 8% / 2 (semiannually)=4%
1)
JOURNAL ENTRY JULY 1, 2013

DEBIT

CREDIT

ACCT. 3021 HW 1
Investment in Bonds

$ 240 million

Discount on bonds Investment

$ 40 million

Cash (price paid for the bonds)

$ 200 million

2)
JOURNAL ENTRY DEC. 31 2013
Cash (stated rate x face amount)(3% x
$ 240 millions)
=

DEBIT
$ 7.2
million

Discount on Bond Investment ($ 8M- $


7.2M) =
Investment revenue (market rate x
outstanding balance) (4% x $200
million) =

$ 0.8
millions

CREDIT

$ 8 million

3)
In balance sheet of Dec. 31 2013 Tarner UNF will report investment amount
of $ 200.8 million which is book value (amortized cost) of the securities at
that moment. $240M $39.2M = 200.8M
4)
JOURNAL ENTRY JANUARY 02. 2014
Cash (selling price)

DEBIT
$190 million

Loss on sale of investments ($210M $190M) =


Discount on bond investment ($40M
0.8M) =
Fair value adjustment

$ 20 million

CREDIT

$ 39.2 million
$9.2 million*

Investment in Bonds

$ 240 million

$240(face amount) $ 39.2(discount on bond invest.) = $200.8


(carrying value of the bond or amortized cost). Therefore, fair value
adjustment is $210M - $200.8M = $9.2M*
E 12 2
FF&T CORPORATION
JOURNAL ENTRY NOV. 1 2013

DEBIT

Cash

$ 2.4M
Investment revenue

CREDIT

$ 2.4M

JOURNAL ENTRY DEC. 1 2013

DEBIT

Investment in Facsimile Enterp.


Bonds

$30M

Cash

$30M

JOURNAL ENTRY DEC. 31


2013

DEBIT

Investment in U.S Treasury bills

$ 8.9M

Cash

CREDIT

$ 8.9M

ADJUSTING ENTRY DEC. 31


2013

DEBIT

Convenience bonds ($48M x 10%


x 2/12)
=

$ 0.8
million

Facsimile Enterprise bonds ($30M


x 12% x 1/12)
=

$ 0.3
million

Investment revenue

ACCT. 3021 HW 1
CREDIT

CREDIT

$ 1.1 million

E 12 3
1)
FASB ACS 320 -10 -25: Investments Debt and Equity Securities
Overall Recognition.

ACCT. 3021 HW 1

2)
FASB ACS 320 - 10 25 4: Investments - Debt and Equity Securities
Overall - Recognition - Circumstances Not Consistent with Held-toMaturity Classification.
3)

P 12-1
Fuzzy Monkey Technologies Inc.
1)
JOURNAL ENTRY JANUARY 1, 2013
Investment in Bonds

DEBIT
$ 80 million

CREDIT

Discount on bonds Investment

$ 14 million

Cash (price paid for the bonds)


2)

$ 66 million

Outstanding Balance
$ 80 million

Effective rate
4%*

Effective Interest
$3.2 million

ACCT. 3021 HW 1
x
*Interest paid semiannually then: one-half the market rate would be
8%/2 = 4%
JOURNAL ENTRY JUN 30,
2013
Cash
Discount on bond Investment
Interest Revenue (5% x $
66M)

CREDIT

DEBIT

$3.2 million
$0.1 million*
$3.30 million

3)
JOURNAL ENTRY DEC. 31,
2013
Cash
Discount on bond investment

DEBIT
$3.2million
$0.105million
**

Interest Revenue (5% x


$66.1M)
DATE

06/30/1
3
12/31/1
3

CREDIT

CASH
EFFECTIVE
INTEREST INTEREST
($80M x
4%)=$3.
2M
$3.2M
5% x
($66M)=$3.3M
$ 3.2M
5% x
($66.1M)=$3.30
5M

$3.305 million

INCREASE IN
BALANCE

OUTSTANDING
BALANCE

$3.3M - $3.2M=$
0.1M*

$66M+
$0.1M=$66.1M

$3.305M - $3.2M=$ $66.1M+


0.105M**
$0.105M=$66.2
05M

4)
Fuzzy Monkey will report book value of its investment in the balance
sheet on Dec 31, 2013. It is also amortized cost of the investment.
BALANCE SHEET AS OF DECEMBER 31, 2013
Investment in bonds
Less: Discount on bond investment ($14 $0.1 $0.105)
Book Value (amortized cost)
5)
Fuzzy Monkey`s cash flow statement of 2013.

$ 80 million
$13.795
$ 66.205

ACCT. 3021 HW 1
Operating activities:
Collections of interests - $ 3.2M ( JUN 30, 2013)+ 3.2M(DEC. 31, 2013)
= $6.4M