Q1. Securities held-to-maturity; bond investment; effective interest
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2016. 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, 2016 was $210 million.
Required:
1. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2016.
2. Prepare the journal entry by Tanner-UNF to record interest on December 31, 2016, at the effective (market) rate.
3. At what amount will Tanner-UNF report its investment in the December 31, 2016, balance sheet? Why?
4. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2017, for $190 million. Prepare the journal entry to record the sale.
Q2. Various transactons relating to trading securities
Rantzow-Lear Company buys and sells securities expecting to earn profits on short-term differences in price. The company's fiscal year ends on December 31. The following selected transactions relating to Rantzow-Lear's trading account occurred during December 2016 and the first week of 2017.
2016
Dec. 17 Purchased 100,000 Grocers' Supply Corporation preferred shares for $350,000.
28 Received cash dividends of $2,000 from the Grocers' Supply Corporation preferred shares.
31 Recorded any necessary adjusting entry relating to the Grocers' Supply Corporation preferred shares. The market price of the stock was $4 per share.
2017
Jan. 5 Sold the Grocers' Supply Corporation preferred shares for $395,000.
Required:
1. Prepare the appropriate journal entry for each transaction.
2. Indicate any amounts that Rantzow-Lear Company would report in its 2016 balance sheet and income statement as a result of this investment.
Q3. Classification of securities; adjussting entries
On February 18, 2016, Union Corporation purchased 10,000 shares of IBM common stock as a long-term investment at $60 per share. On December 31, 2016, and December 31, 2017, the market value of IBM stock is $58 and $61 per share, respectively.
Required:
1. What is the appropriate reporting category for this investment? Why?
2. Prepare the adjusting entry for December 31, 2016.
3. Prepare the adjusting entry for December 31, 2017.
Q4. Accounting for debt investments
Watney Inc. purchased $10,000 of 6% Hamel bonds at par on July 1, 2016. The bonds pay interest semiannually, and pay only interest and principal. Watney intends to hold the Hamel bonds for purposes of collecting the cash flows provided by interest and principal. During the second half of 2016, an increase in interest rates reduced the fair value of the bonds to $9,000. Watney reports investments under IFRS No. 9.
Required:
1. Prepare the December 31, 2016, journal entry to record Watney's interest revenue.
2. Prepare the December 31, 2016, journal entry (if any is required) to record unrealized gains or losses on the Hamel bonds during 2016. (Do not consider whether an impairment should be recorded.)