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Test Bank for Intermediate Accounting, Twelfth Edition 17 - 26
EXERCISES
Ex. 17-105 —Investment in debt securities at premium.
On April 1, 2007, Sean Co. purchased $160,000 of 6% bonds for $166,300 plus accrued interest
as an available-for-sale security. Interest is paid on July 1 and January 1 and the bonds mature
on July 1, 2012.
Instructions
(a) Prepare the journal entry on April 1, 2007.
(b) The bonds are sold on November 1, 2008 at 103 plus accrued interest. Amortization was
recorded when interest was received by the straight-line method (by months and round to the
nearest dollar). Prepare all entries required to properly record the sale.
Solution 17-105
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Ex. 17-106 —Investment in debt securities at a discount.
On May 1, 2007, Gipson Corp. purchased $450,000 of 12% bonds, interest payable on January 1
and July 1, for $422,800 plus accrued interest. The bonds mature on January 1, 2013.
Amortization is recorded when interest is received by the straight-line method (by months and
round to the nearest dollar). (Assume bonds are available for sale.)
Instructions
(a) Prepare the entry for May 1, 2007.
(b) The bonds are sold on August 1, 2008 for $425,000 plus accrued interest. Prepare all entries
required to properly record the sale.
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Investments 17 - 27
Solution 17-106
Ex. 17-107 —Investments in equity securities.
Presented below are unrelated cases involving investments in equity securities.
Case I. The fair value of the trading securities at the end of last year was 30% below original
cost, and this was properly reflected in the accounts. At the end of the current year, the fair value
has increased to 20% above cost.
Case II. The fair value of an available-for-sale security has declined to less than forty percent of
the original cost. The decline in value is considered to be other than temporary.
Case III. An equity security, whose fair value is now less than cost, is classified as trading but is
reclassified as available-for-sale.
Instructions
Indicate the accounting required for each case separately.