168

CHAPTER 14

Problem 14-1

1. A
2. A
3. C
4. C
5. A
6. B
7. D
8. D
9. D
10. D

Problem 14-2

Bonds as trading
2005
April 1 Trading securities 2,200,000
Cash 2,200,000

Oct. 1 Cash (2,000,000 x 12% x 6/12) 120,000

Interest income
120,000

Dec. 31 Accrued interest receivable 60,000

Interest income (2,000,000 x 12% x 3/12) 60,000

2006
Jan. 1 Interest income 60,000
Accrued interest receivable 60,000

April 1 Cash 120,000

Interest income 120,000

Oct. 1 Cash 120,000

Interest income 120,000

Dec. 31 Accrued interest receivable 60,000

Interest income 60,000

Bonds held to maturity

2005
April 1 Investment in bonds 2,200,000
Cash 2,200,000

Oct. 1 Cash 120,000

Interest income
120,000
 169
2005
Dec. 31 Accrued interest receivable 60,000
Interest income
60,000

Dec. 31 Interest income (50,000 x 9/12) 37,500

Investment in bonds 37,500

2006
Jan. 1 Interest income 60,000
Accrued interest receivable 60,000

April 1 Cash 120,000

Interest income
120,000

Oct. 1 Cash 120,000

Interest income
120,000

Dec. 31 Accrued interest receivable 60,000

Interest income 60,000

31 Interest income (200,000/4) 50,000

Investment in bonds 50,000

Problem 14-3

Bonds as available for sale

2005
Jan. 1 Available for sale securities (4,000,000 x 95%) 3,800,000
Interest income (4,000,000 x 12% x 4/12) 160,000
Cash 3,960,000

Mar. 1 Cash 240,000

Interest income (4,000,000 x 12% x 6/12) 240,000

Sept. 1 Cash 240,000

Interest income
240,000

Dec. 31 Accrued interest receivable 160,000

Interest income (4,000,000 x 12% x 4/12) 160,000

2006
Jan. 1 Interest income 160,000
Accrued interest receivable 160,000

Mar. 1 Cash 240,000

Interest income
240,000
Sept. 1 Cash 240,000
Interest income
240,000
170
2006
Dec. 31 Accrued interest receivable 160,000
Interest income
160,000

Bonds as held to maturity

2005
Jan. 1 Investment in bonds 3,800,000
Interest income 160,000
Cash 3,960,000

Mar. 1 Cash 240,000

Interest income
240,000

Sept. 1 Cash 240,000

Interest income
240,000

Dec. 31 Accrued interest receivable 160,000

Interest income
160,000

31 Investment in bonds (200,000/50 months x 12) 48,000

Interest income
48,000

2006
Jan. 1 Interest income 160,000
Accrued interest receivable 160,000

Mar. 1 Cash 240,000

Interest income
240,000

Sept. 1 Cash 240,000

Interest income
240,000

Dec. 31 Accrued interest receivable 160,000

Interest income
160,000

31 Investment in bonds 48,000

Interest income 48,000

Problem 14-4
Aug. 1 Trading securities (5,050,000 + 150,000) 5,200,000
Interest income (5,000,000 x 12% x 3/12) 150,000
Cash 5,350,000

31 Trading securities (1,960,000 + 100,000) 2,060,000

Interest income (2,000,000 x 12% x 2/12) 40,000
Cash 2,100,000

171

Nov. 1 Cash (5,000,000 x 12% x 6/12) 300,000

Interest income
300,000

Dec. 1 Cash (1,880,000 + 20,000) 1,900,000

Loss on sale of trading securities 200,000
Trading securities 2,080,000
Interest income (2,000,000 x 12% x 1/12) 20,000

Selling price (2,040,000 – 160,000)

1,880,000
Less: Cost of bonds sold (2,000/5,000 x 5,200,000)
2,080,000
Loss on sale
( 200,000)

Dec. 31 Cash (2,000,000 x 12% x 6/12) 120,000

Interest income
120,000

31 Accrued interest receivable (3,000,000 x 12% x 2/12) 60,000

Interest income
60,000

31 Unrealized loss – TS 260,000

Trading securities 260,000

Cost Market
Acme bonds (3,000,000 x 98%) 3,120,000 2,940,000
Avco bonds (2,000,000 x 99%) 2,060,000 1,980,000
5,180,000 4,920,000

Current assets:
Trading securities, at market value 4,920,000

Problem 14-5

Requirement a

March 1 Available for sale securities (2,000,000 x 93%) 1,860,000

Interest income (2,000,000 x 12% x 1/12) 20,000
Cash 1,880,000
April 1 Available for sale securities (4,000,000 x 95%) 3,800,000
Interest income (4,000,000 x 12% x 1/12) 40,000
Cash 3,840,000

Aug. 1 Cash (2,000,000 x 12% x 6/12) 120,000

Interest income 120,000

Sept. 1 Cash (4,000,000 x 12% x 6/12) 240,000

Interest income 240,000

172
Oct. 1 Cash (1,010,000 + 10,000) 1,020,000
Interest income (1,000,000 x 12% x 1/12)
10,000
Available for sale securities 950,000
Gain on sale of AFS securities
60,000

Sales price (1,000,000 x 105%) 1,050,000

Less: Brokerage 40,000
Net proceeds 1,010,000
Less: Cost of bonds sold (1,000/4,000 x 3,800,000)
950,000
Gain on sale
60,000

Dec. 1 Cash (1,940,000 + 80,000) 2,020,000

Available for sale securities 1,860,000
Interest income (2,000,000 x 12% x 4/12)
80,000
Gain on sale of AFS securities 80,000

Cash received (2,000,000 x 100%)

2,000,000
Less: Brokerage 60,000
Net selling price 1,940,000
Less: Cost of bonds sold 1,860,000
Gain on sale
80,000

31 Accrued interest receivable (3,000,000 x 12% x 4/12) 120,000

Interest income
120,000

31 Unrealized loss – AFS 150,000

Available for sale securities 150,000

Requirement b

Current assets:
Available for sale securities, at market value 2,700,000
Stockholders’ equity:
Unrealized loss – AFS ( 150,000)
Problem 14-6

Requirement a
2005
May 1 Investment in bonds (6,000,000 x 94%) 5,640,000
Interest income (6,000,000 x 12% x 3/12) 180,000
Cash 5,820,000

Aug. 1 Cash 360,000

Interest income (6,000,000 x 12% x 6/12) 360,000

Dec. 31 Accrued interest receivable 300,000

Interest income (6,000,000 x 12% x 5/12) 300,000
173
2005

Dec. 31 Investment in bonds (8,000 x 8) 64,000

Interest income 64,000

May 1, 2004 – February 1, 2008 = 45 months

360,000/45 = 8,000 monthly amortization

Requirement b

2007
May 1 Investment in bonds (8,000 x 4) 32,000
Interest income
32,000

1 Cash (6,300,000 + 180,000) 6,480,000

Investment in bonds 5,832,000
Interest income (6,000,000 x 12% x 3/12)
180,000
Gain on sale of bonds 468,000

Original cost – May 1, 2005

5,640,000
Add: Discount amortization from May 1, 2005 to
May 1, 2007 (8,000 x 24 months) 192,000
Book value, May 1, 2007 5,832,000

Selling price (6,000,000 x 105%) 6,300,000

Less: Book value 5,832,000
Gain on sale 468,000

Problem 14-7

2005
1. Feb. 1 Investment in bonds (7,000,000 x 105%) 7,350,000
 Interest income (7,000,000 x 12% x 1/12) 70,000
Cash
7,420,000

June 30 Cash 420,000

Interest income (7,000,000 x 12% x 6/12)
420,000

Dec. 31 Cash 420,000

Interest income 420,000

31 Interest income (10,000 x 11) 110,000

Investment in bonds
110,000

February 1, 2004 – January 1, 2007 = 35 months

350,000/35 = 10,000 monthly

174
2006
2. Feb. 1 Interest income (10,000 x 1) 10,000
Investment in bonds 10,000

3. Cash 70,000
Investment in equity securities 7,700,000
Investment in bonds 7,110,000
Interest income (7,000,000 x 12% x 1/12) 70,000
Gain on exchange 590,000

Fair value of bonds (7,000,000 x 110%) 7,700,000

Less: Book value of bonds, February 1, 2007:
Book value, February 1, 2005 7,350,000
Less: Premium amortization
2005 110,000
2006 120,000
2007 10,000 240,000 7,110,000
Gain on exchange 590,000

Problem 14-8

May 1, 2005

Investment in bonds (8,000,000 x 96% + 40,000) 7,720,000

Interest income (8,000,000 x 12% x 2/12) 160,000
Cash 7,880,000
May 1, 2006

Original cost – May 1, 2005 7,720,000

Add: Amortization from May 1, 2005 to May 1, 2006 (7,000 x 12)
84,000
Book value – May 1, 2006 7,804,000
Monthly amortization (280,000/40 months) 7,000

Sales price (2,000,000 x 105)

2,100,000
Less: Book value sold (2,000/8,000 x 7,804,000) 1,951,000
Gain on sale 149,000

Sales price 2,100,000

Add: Accrued interest from March 1 to May 1, 2006
40,000
(2,000,000 x 12% x 2/12)
Total cash received 2,140,000

Cash 2,140,000
Investment in bonds 1,951,000
Interest income 40,000
Gain on sale of bonds 149,000

175
December 31, 2007

Book value – May 1, 2006 7,804,000

Less: Book value sold 1,951,000
Adjusted balance – May 1, 2006 5,853,000
Add: Amortization from May 1, 2006 to December 31, 2007 (5,250 x 20)
105,000
Book value – December 31, 2007 5,958,000

Revised monthly amortization (6,000/8,000 x 7,000)

5,250

Market value of stock (120,000 x 55)

6,600,000
Less: Book value converted 5,958,000
Gain on exchange 642,000

Cash (6,000,000 x 12% x 4/12) 240,000

Investment in equity securities 6,600,000
Investment in bonds 5,958,000
Interest income 240,000
Gain on exchange 642,000

Problem 14-9

Date Investment balance Premium Years Annual

amortization
Jan. 1, 2003 6,480,000
Jan. 1, 2005 6,180,000 300,000 2 150,000
Jan. 1, 2009 6,060,000 120,000 4 30,000
Jan. 1, 2013 6,000,000 60,000 4 15,000
480,000 10
 2005
June 30 Cash 360,000
Interest income (6,000,000 x 12% x 6/12) 360,000

Dec. 31 Cash 360,000

Interest income
360,000

31 Interest income 30,000

Investment in bonds 30,000

Problem 14-10

Date Investment balance Premium Years Annual

amortization
Jan. 1, 2003 4,320,000
Jan. 1, 2005 4,160,000 160,000 2 80,000
Jan. 1, 2007 4,080,000 80,000 2 40,000
Jan. 1, 2009 4,040,000 40,000 2 20,000
Jan. 1, 2013 4,000,000 40,000 4 10,000
320,000 10
176
2005
June 30 Cash 240,000
Interest income (4,000,000 x 12% x 6/12) 240,000

Dec. 31 Cash 240,000

Interest income
240,000

31 Interest income 40,000

Investment in bonds 40,000

2007
Jan 1 Cash (4,000,000 x 102) 4,080,000
Investment in bonds 4,080,000

Problem 14-11

Date Investment balance Premium Years Annual

amortization
July 1, 2003 6,600,000
Jan. 1, 2006 6,240,000 360,000 2.5 144,000
Jan. 1, 2010 6,060,000 180,000 4 45,000
Jan. 1, 2013 6,000,000 60,000 3 20,000
600,000 9.5

2005
Jan. 1 Interest income 360,000
Accrued interest receivable 360,000
 Reversing entry.

1 Cash 360,000
Interest income 360,000

July 1 Cash 360,000

Interest income
360,000

Dec. 31 Accrued interest receivable 360,000

Interest income (6,000,000 x 12% x 6/12) 360,000

31 Interest income 144,000

Investment in bonds 144,000

2010
Jan. 1 Cash 6,060,000
Investment in bonds 6,060,000

177

Problem 14-12

Year Bond outstanding Fraction Premium amortization

2005 1,000,000 10/30 50,000
2006 800,000 8/30 40,000
2007 600,000 6/30 30,000
2008 400,000 4/30 20,000
2009 200,000 2/30 10,000
3,000,000 150,000

2007
June 30 Cash (600,000 x 12% x 6/12) 36,000
Interest income
36,000

Dec. 31 Cash 36,000

Interest income
36,000

31 Interest income 30,000

Investment in bonds 30,000

31 Cash 200,000
Investment in bonds 200,000
Problem 14-13

Year Bond outstanding Fraction Discount amortization

2005 4,000,000 4/10 120,000
2006 3,000,000 3/10 90,000
2007 2,000,000 2/10 60,000
2008 1,000,000 1/10 30,000
10,000,000 300,000

2007
Dec. 31 Cash 240,000
Interest income
240,000

31 Investment in bonds 60,000

Interest income
60,000

31 Cash 1,000,000
Investment in bonds 1,000,000

178
2008
Dec. 31 Cash 120,000
Interest income
120,000

31 Investment in bonds 30,000

Interest income
30,000

31 Cash 1,000,000
Investment in bonds 1,000,000

Problem 14-14

Bond Months Peso

Discount
Bond year outstanding outstanding months Fraction
amortization
10/1/2005 – 2/1/2006 3,000,000 4 12,000,000 12/48
75,000
2/1/2006 – 2/1/2007 2,000,000 12 24,000,000 24/48
150,000
2/1/2007 – 2/1/2008 1,000,000 12 12,000,000 12/48
75,000
48,000,000 300,000

2005
Oct. 1 Investment in bonds 2,700,000
Interest income (3,000,000 x 12% x 2/12) 60,000
Cash 2,760,000

Dec. 31 Accrued interest receivable 150,000

Interest income (3,000,000 x 12% x 5/12) 150,000

31 Investment in bonds 56,250

Interest income (75,000 x 3/4)
56,250

2006
Jan. 1 Interest income 150,000
Accrued interest receivable 150,000

Feb. 1 Cash (3,000,000 x 12% x 6/12) 180,000

Interest income
180,000

1 Cash 1,000,000
Investment in bonds 1,000,000

Aug. 1 Cash (2,000,000 x 12% x 6/12) 120,000

Interest income
120,000

Dec. 31 Accrued interest receivable 100,000

Interest income (2,000,000 x 12% x 5/12) 100,000

31 Investment in bonds 156,250

Interest income
156,250
179

From January1 to February 1, 2006 (75,000 x 1/4)

18,750
From February 1 to December 31, 2006 (150,000 x 11/12)
137,500
Total amortization for year 2006 156,250

Problem 14-15

Date Interest received Interest income Discount amortization

Book value
01/01/2005 3,757,015
12/31/2005 400,000 450,842 50,842 3,807,857
12/31/2006 400,000 456,943 56,943 3,864,800
12/31/2007 400,000 463,776 63,776 3,928,576
12/31/2008 400,000 471,424 71,424 4,000,000

2007
Dec. 31 Cash 400,000
 Interest income 400,000

31 Investment in bonds 63,776

Interest income 63,776

Problem 14-16

Date Interest received Interest income Premium amortization

Carrying value
Jan. 1, 2005 3,111,510
June 30, 2005 120,000 93,345 26,655 3,084,855
Dec. 31, 2005 120,000 92,546 27,454 3,057,401
June 30, 2006 120,000 91,722 28,278 3,029,123
Dec. 31, 2006 120,000 90,877 29,123 3,000,000

2005
Jan. 1 Investment in bonds 3,111,510
Cash 3,111,510

June 30 Cash 120,000

Interest income 120,000

30 Interest income 26,655

Investment in bonds
26,655

Dec. 31 Cash 120,000

Interest income 120,000

31 Interest income 27,454

Investment in bonds 27,454

180
Problem 14-17

Semiannual nominal interest (5,000,000 x 4%)

200,000
Semiannual effective interest (5,000,000 x 5%) 250,000
Difference 50,000
Multiply by present value of annuity of 1 for 20 periods at 5% 12.462
Discount 623,100

Face value 5,000,000

Discount ( 623,100)
Purchase price 4,376,900

Problem 14-18

Annual nominal interest (4,000,000 x 16%)

640,000
Annual effective interest (4,000,000 x 12% 480,000
Difference 160,000
Multiply by present value factor 3.605
Premium 576,800
Face value 4,000,000
Purchase price 4,576,800

Date Interest received Interest income Premium amortization

Book value
Jan. 1, 2005 4,576,800
Dec. 31, 2005 640,000 549,216 90,784 4,486,016
Dec. 31, 2006 640,000 538,322 101,678 4,384,338
Dec. 31, 2007 640,000 526,121 113,879 4,270,459
Dec. 31, 2008 640,000 512,455 127,545 4,142,914
Dec. 31. 2009 640,000 497,086 142,914 4,000,000

Problem 14-19 Answer D

Trading debt securities, at market value 945,000

Problem 14-20

Question 1 – Answer A

Acquisition cost (4,400,000 – 100,000)

4,300,000
Amortization of premium from Oct. 1, 2005 to Dec. 31, 2006 (4,000 x 15) (
60,000)
Book value – December 31, 2006 4,240,000

Monthly amortization (300,000/75 months) 4,000

Question 2 – Answer B

Interest for 2006 (4,000,000 x 10%)

400,000
Amortization of premium ( 48,000)
Interest income 352,000
181

Problem 14-21 Answer B

Interest for 2006 (2,000,000 x 12%)

240,000
Amortization of discount (100,000/5)
20,000
Interest income 260,000

Problem 14-22 Answer D

Monthly amortization (100,000/80 months) 1,250

Interest for 2006 (2,000,000 x 12%)
240,000
Amortization of premium (1,250 x 12)
( 15,000)
Interest income 225,000

Problem 14-23 Answer A

Purchase price 3,800,000

Less: Accrued interest from April1 to July 1, 2003 (4,000,000 x 12% x 3/12)
120,000
3,680,000
Add: Brokerage 110,000
Adjusted cost – July 1, 2003 3,790,000
Add: Amortization of discount from July 1, 2003 to December 31, 2005
(210,000 / 3 years x 2.5) 175,000
Book value – December 31, 2005 3,965,000

Sales price 4,500,000

Less: Book value 3,965,000
Gain on sale of bonds
535,000

Problem 14-24 Answer B

Premium on sale of bonds 140,000

Unamortized discount (100,000 – 20,000) 80,000
Gain on sale of bonds
220,000

Problem 14-25 Answer D

Acquisition cost (4,000,000 x 97%) 3,880,000

Amortization of discount from May 1, 2003 to June 1, 2005
(120,000/40 x 25) 75,000
Book value – June 1, 2005 3,955,000

Market value of bonds (4,000,000 x 105) 4,200,000

Less: Book value 3,955,000
Gain on exchange 245,000

182

Problem 14-26 Answer A

Monthly amortization of discount (290,000/58 months) 5,000

Acquisition cost 1,710,000

Amortization of discount from June 1, 2005 to April 1, 2006 (5,000 x 10)
50,000
Book value – April 1, 2006 1,760,000

Market value of bonds (2,000,000 x 99%) 1,980,000

Less: Book value of bonds converted
1,760,000
Gain on exchange 220,000

Problem 14-27 Answer D

Date Investment balance Premium Years Annual

amortization
1/1/2003 6,600,000
1/1/2006 6,240,000 360,000 3 120,000
1/1/2010 6,060,000 180,000 4 45,000
1/1/2013 6,000,000 60,000 3 20,000
600,000 10

Interest for the year 2006 (6,000,000 x 12%) 720,000

Amortization of premium for 2006 ( 45,000)
Interest revenue 675,000

Problem 14-28 Answer A

Bond year Bond outstanding Fraction Amortization

4/1/2005 – 3/31/2006 4,000,000 4/10 80,000
4/1/2006 – 3/31/2007 3,000,000 3/10 60,000
4/1/2007 – 3/31/2008 2,000,000 2/10 40,000
4/1/2008 – 3/31/2009 1,000,000 1/10 20,000
10,000,000 200,000

Interest for the year 2006:

From January 1 to March 31, 2006 (4,000,000 x 12% x 3/12) 120,000
From April 1 to December 31, 2006 (3,000,000 x 12% x 9/12) 270,000 390,000
Amortization of discount for year 2006:
From January 1 to March 31, 2006 (80,000 x 3/12) 20,000
From April 1 to December 31, 2006 (60,000 x 9/12) 45,000
65,000
Interest income for year 2006 455,000

Problem 14-29 Answer D

Interest income (3,756,000 x 10%) 375,600

183
Problem 14-30 Answer D

Interest accrued from July 1 to December 31, 2005 (5,000,000 x 8% x 6/12)

200,000
Problem 14-31 Answer C

Interest received (1,000,000 x 10% x 6/12)

50,000
Interest income (1,198,000 x 8% x 6/12) 47,920
Premium amortization
2,080

Acquisition cost – July 1, 2005

1,198,000
Premium amortization
( 2,080)
Book value – Dec. 31, 2005 1,195,920

Problem 14-32 Answer A

Interest accrued (1,000,000 x 8% x 6/12) 40,000

Interest income (906,000 x 10% x 6/12) 45,300
Discount amortization
5,300

Acquisition cost – July 1, 2005 (946,000 - 40,000) 906,000

Discount amortization
5,300
Book value – December 31, 2005 911,300

Problem 14-33 Answer B

Acquisition cost – July 1, 2005

4,614,000
Discount amortization from July 1 to December 31, 2005:
Interest accrued (5,000,000 x 8% x 6/12) 200,000
Interest income (4,614,000 x 10% x 6/12) 230,700
30,700
Book value – December 31, 2005 4,644,700

Problem 14-34 Answer A

Annual effective (5,000,000 x 14%) 700,000

Annual nominal (5,000,000 x 12%) 600,000
Difference 100,000
Multiply by present value factor using effective rate of 14%
5.216
Discount 521,600
Face value 5,000,000
Purchase price 4,478,400

Problem 14-35 Answer C

Market value of PS (50,000 x 70) 3,500,000

Carrying value of bond investment 4,000,000
Loss on exchange ( 500,000)