SIMS 5 - Research(1GradableItem Answer:FASBASC:32010304...

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Research   (1 Gradable Item)  Answer:  FASB ASC:  320-10-30-4  Equity Method Is No Longer Appropriate    30-4   If it is determined that a marketable equity security should no longer be accounted for under the  equity method (for example, due to a decrease in the level of ownership), the security’s initial basis shall be the previous carrying amount of the investment. Paragraph 323-10-35-36 states that the earnings or losses  that relate to the stock retained shall remain as a part of the carrying amount of the investment and that the  investment account shall not be adjusted retroactively. Subsequently, the security shall be accounted for  pursuant to paragraph 320-10-35-1.  Investments in Bonds   (6 Gradable Items)  1. $54,083.   An investment in a bond should be recorded at its fair value (its purchase price), i.e., the  present value of its cash flows discounted at the market (yield) rate of interest. The present value  of the bonds’ face amount at maturity is $43,190 (50 bonds  ×  $1,000 face amount  ×  0.8638 PV  factor for a single amount at the market rate), and the present value of the periodic cash interest  payments is $10,893 (50 bonds  ×  $1,000 face amount  ×  8% stated rate  ×  2.7232 PV factor for an  annuity at the market rate). Thus, the total amount paid for the bonds (i.e., their present value at  the market rate of interest) is $54,083 ($43,190 PV of face amount + $10,893 PV of interest  payments).  2. $4,083.   If the bonds’ stated rate is greater than the market (yield) rate of interest at the time of the  purchase, the purchase price is higher than the face amount and the bonds are purchased at a  premium. The amount of premium is equal to the difference between the purchase price and the  face amount ($54,083 - $50,000 = $4,083).  3. $4,000.   The annual cash interest is $4,000 (50 bonds  ×  $1,000 face amount  ×  8% stated rate).  4. $2,704.   The amount of interest revenue recognized in Year 1, is equal to the carrying amount (fair value) of the bond on January 1, Year 1, times the effective (yield) rate ($54,083  ×  5% = $2,704). 
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5. $1,296.
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