Question: 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.
- Record the unrealized gains or losses occurring at year end.
- Record the unrealized gains or losses adjustment required on sale.
- Record the sale of the Coca-Cola bonds in 2019.
- Record the unrealized gains or losses occurring at year end.
- Record the unrealized gains or losses adjustment required on sale.
- Record the sale of the Coca-Cola bonds in 2019.
- Record the entry for fair value adjustment of December 31, 2018.
- Record the entry to adjust to fair value on the date of sale.
- Record the entry to reverse the previous fair value adjustment.
- Record the entry for sale of investment in Coca Cola bonds.
*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)?
* Fowler Inc. purchased $75,000 of bonds on January 1, 2018. The bonds pay interest semiannually and mature in 20 years, at which time the $75,000 principal will be paid. The bonds do not pay any amounts other than interest and principal. During 2018, the fair value of the bonds increased to $80,000. Fowler reports investments under IFRS No. 9. Fowler intends to hold the bonds until maturity.
How much unrealized gain or loss would Fowler include in 2018 net income with respect to the bonds?
Turner Company owns 10% of the outstanding stock of ICA Company. During the current year, ICA paid a $5 million cash dividend on its common shares.
What effect did this dividend have on Turner's 2018 financial statements?
Balance sheet
Income statement
The fair value of Wallis, Inc.,'s depreciable assets exceeds their book value by $50 million. The assets have an average remaining useful life of 15 years and are being depreciated by the straight-line method. Park Industries buys 30% of Wallis's common shares.
When Park adjusts its investment revenue and the investment by the equity method, how will the situation described affect those two accounts?
_____would be_____ by ____ million each year for remaining 15 years.
Turner Company purchased 40% of the outstanding stock of ICA Company for $10,000,000 on January 2, 2018. Turner elects the fair value option to account for the investment. During 2018, ICA earns $750,000 of income and on December 30 pays a dividend of $500,000. On December 31, 2018, the fair value of Turner's investment has increased to $11,500,000.
Prepare the journal entries in the books of Turner to account for this investment during 2018. Assume that Turner will account for the investment for a trading security.
-Record the investment.
-Record the investment revenue realized.
-Record the fair value adjustment.
• LED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as securities available-for-sale. The market price of Branch's bonds fell by $450,000, due to concerns about one of the company's principal drugs. The concerns were justified when the FDA banned the drug. $100,000 of that decline in value already had been included in OCI as a temporary unrealized loss in a prior period. LED views $200,000 of the $450,000 loss as related to credit losses, and the other $250,000 as noncreditlosses. LED thinks it is more likely than not that it will have to sell the investment before fair value recovers. The assumption that LED Corporation used the AFS Credit Loss Model introduced in ASU 2016-13 and required after 2020.
What journal entries should LED record to account for the decline in market value in the current period? How should the decline affect net income and comprehensive income?
• Record the entry for reclassification adjustment.
• Record the entry for credit losses.
How should the decline affect net income and comprehensive income?
Effects
Income statement
Other comprehensive income
Net effect on comprehensive income
Wickum Corporation reports under IFRS, and recognized a $500,000 other-than-temporary impairment of an HTM debt investment in Right Corporation. Subsequently, the fair value of Wickum's investment in Right increased by $300,000.
Prepare the journal entry to account for the increase in fair value.