Tutorial 8 [exercise].docx

Tutorial 8 Financial Accounting 2 Investments Teaching Assistant Team Problem 1 – Debt Investments (FVOCI) On January 1, 2017, Ellison Company purchased 12% bonds, having a maturity value of $800,000, for $860,652. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2023, with interest receivable December 31 of each year. Ellison’s business model is to hold these bonds to collect contractual cash flows and selling the bonds. Instructions: a. Prepare a bond amortization schedule through 2019. b. Prepare the journal entry at the date of the bond purchase. c. Prepare the journal entry to record the interest received and the amortization for 2017. d. Prepare any entries necessary at December 31, 2017, assuming the fair value of the bonds is $860,000. e. Prepare any entries necessary at December 31, 2018, assuming the fair value of the bonds is $840,000. f. Prepare any entries necessary at March 1, 2019, if Ellison sold the Watson bonds for $850,000. Problem 2 – Debt Investments (Amortized Cost) On July 1, 2017, Kirmer Corp. purchased $450,000 of 6% bonds, interest payable on January 1 and July 1, for $428,800 (a 7% effective interest rate). The bonds mature on July 1, 2023. Amortization is recorded when interest is received by the effective-interest method (round to the nearest dollar). Kirmer Corp’s business model is to hold these bonds to collect contractual cash flows. Instructions: a. Prepare a bond amortization schedule through 2018. b. Prepare the journal entry at the date of the bond purchase. c. Prepare the journal entry to record the interest received and the amortization for 2017 d. Prepare the journal entry to record the interest received on January 1, 2018 e. Prepare the journal entry if the bonds are sold on October 1, 2018 for $427,000 plus accrued interest.

Problem 3 – Debt Investments Presented below is an amortization schedule related to PT Maju Bersama’s 5-year, $100,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2017, for $108,660. Date

Cash received

12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22

$7,000 7,000 7,000 7,000 7,000

Interest Revenue

Bond Premium Amortization

$5,433 5,354 5,272 5,186 5,095

$1,567 1,646 1,728 1,814 1,905

Carrying Amount of Bonds $108,660 107,093 105,447 103,719 101,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end:

Amortized Cost Fair Value

12/31/18 $107,093 106,500

12/31/19 $105,447 107,500

12/31/20 $103,719 105,650

12/31/21 $101,905 103,000

12/31/22 $100,000 100,000

Instructions: Assuming the bonds classified as amortized cost a. Prepare the journal entry to record the purchase of these bonds on December 31, 2017 b. Prepare the journal entry(ies) for 2018. c. Prepare the journal entry(ies) for 2020. Assuming the bonds classified as FVTPL a. Prepare the journal entry(ies) to record the purchase of these bonds b. Prepare the journal entry(ies) for 2018. c. Prepare the journal entry(ies) for 2020.