ch17 - B EXERCISES (L0 1, 3) E17-1B (Investment...

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B EXERCISES E17-1B (Investment Classifications) For the following investments identify whether they are: 1. Trading securities 2. Available-for-sale securities 3. Held-to-maturity securities Each case is independent of the other. (a) Purchase bonds maturing in 20 years. The company intends to use the cash flow generated by the interest payments on the bond to provide employee bonuses. (b) Common stock was purchased based on a recommendation from the CEO’s broker. The broker believes the price will increase substantially over the next couple of months. (c) An investment grade bond that matures in 8 years was purchased. The company will probably hold the bonds until they mature at which time the proceeds will be used to retire maturing debt. (d) Five-year bonds of a troubled company were purchased this year for substantially below par value. The bonds mature in 6 months. (e) Excess cash was used to purchase preferred stock. The preferred stock may need to be sold within the next year if a planned expansion is completed. (f) 15% of the outstanding stock of another company was purchased last year. The company is con- sidering purchasing another 20% of the company. E17-2B (Entries for Held-to-Maturity Securities) On July 1, 2006, Salt Mine Corporation purchased at par 8% bonds having a maturity value of $250,000. The bonds are dated July 1, 2006, and mature July 1, 2011, with interest payable on July 1 of each year. The bonds are classified in the held-to-maturity cate- gory, and the company does not use reversing entries. Instructions (a) Prepare the journal entry at the date of the bond purchase. (b) Prepare the journal entry to record the interest earned and interest received for 2006. (c) Prepare the journal entry to record the interest earned and interest received for 2007. E17-3B (Entries for Held-to-Maturity Securities) On January 1, 2006, Hummer Company purchased 5% bonds, having a maturity value of $500,000, for $428,937.98. The bonds provide the bondholders with a 7% yield. They are dated January 1, 2006, and mature January 1, 2016, with interest receivable June 30 and December 31 of each year. Hummer Company uses the effective-interest method to allocate un- amortized discount or premium. The bonds are classified in the held-to-maturity category. Instructions (a) Prepare the journal entry at the date of the bond purchase. (b) Prepare the first 3 years of a bond amortization schedule. (c) Prepare the journal entry to record the interest received and the amortization for 2006. E17-4B (Entries for Available-for-Sale Securities) Assume the same information as in E17-3B except that the securities are classified as available-for-sale. The fair value of the bonds at December 31 of each year-end is as follows. 2006
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ch17 - B EXERCISES (L0 1, 3) E17-1B (Investment...

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