Deficit on January 1, 2008 (30% x 500,000) Carrying value of investment – 1/1/2008 Net income for 2008 (30% x 700,000) Net income for 2009 (30% x 800,000)
Cash dividend on 12/31/2009 (30% x 400,000) Carrying value of investment – 12/31/2009
3,600,000 ( 150 , 00 0) 3,450,000
210,000 240,000 ( 1 20 , 0 0 0 )
3
, 78 0 , 0 00 Another approach
Acquisition cost
Share in retained earnings – 12/31/2009 (30% x 600,000) Carrying value of investment – 12/31/2009
3,600,000 1 8 0 , 000 3
, 78 0 , 000
152
CHAPTER 12
Problem 12-1
1. B 6. C
2. B 7. C
3. A 8. B
4. A 9. B 5. D 10. C Problem 12-2
Bonds held as trading 2008
April 1 Trading securities Cash
Oct. 1 Cash (2,000,000 x 12% x 6/12) Interest income
2,200,000
120,000
2,200,000
120,000
Dec. 31 Accrued interest receivable 60,000
Interest income (2,000,000 x 12% x 3/12) 60,000
31 Trading securities Unrealized gain – TS
100,000
100,000 2009
Jan. 1 Interest income
Accrued interest receivable April 1 Cash
Interest income Oct. 1 Cash
Interest income
60,000
120,000
120,000
60,000
120,000
120,000
Dec. 31 Accrued interest receivable Interest income
31 Unrealized loss – TS
Trading securities (2,300,000 – 1,960,000)
60,000
340,000
60,000
340,000
Bonds held to maturity 2008
April 1 Held to maturity securities Cash
2,200,000
2,200,000
Oct. 1 Cash
Interest income
120,000
120,000
153
2008
Dec. 31 Accrued interest receivable 60,000
Interest income 60,000
31 Interest income (50,000 x 9/12) 37,500
Held to maturity securities 37,500
2009
Jan. 1 Interest income 60,000
Accrued interest receivable 60,000
April 1 Cash
Interest income Oct. 1 Cash
Interest income
120,000
120,000
120,000
120,000
Dec. 31 Accrued interest receivable 60,000
Interest income 60,000
31 Interest income (200,000/4) 50,000
Held to maturity securities 50,000
Problem 12-3
Bonds held as trading Jan. 1 Trading securities
Cash July 1 Cash
Interest income (4,000,000 x 12%)
3,761,000
240,000
3,761,000
240,000
Dec. 31 Accrued interest receivable Interest income
31 Trading securities
Unrealized gain – TS (4,200,000 – 3,761,000)
240,000
439,000
240,000
439,000
Bonds held as available for sale Jan. 1 Available for sale securities
Cash July 1 Cash
Interest income
3,761,000
240,000
3,761,000
240,000
154
July 1 Available for sale securities 23,270
Interest income 23,270
Interest income (3,761,000 x 7%) Interest received
Amortization of discount Dec. 31 Accrued interest receivable
Interest income
263,270 240 , 000 23 , 270 240,000
240,000
31 Available for sale securities 24,899
Interest income 24,899
Interest income (3,784,270 x 7%) Interest accrued
Amortization of discount
264,899 240 , 000 24 , 899 31 Available for sale securities
Unrealized gain – AFS
390,831
390,831 Market value (4,000,000 x 105)
Book value Unrealized gain
4,200,000 3
, 80 9 , 1 6 9 390 , 831
Problem 12-4
Aug. 1 Trading securities (5,000,000 x 104) Interest income (5,000,000 x 12% x 3/12)
Cash
31 Trading securities (2,000,000 x 98) Interest income (2,000,000 x 12% x 2/12)
Cash
5,200,000 150,000
1,960,000 40,000
5,350,000
2,000,000
Nov. 1 Cash (5,000,000 x 12% x 6/12) Interest income
Dec. 1 Cash (1,880,000 + 20,000)
Loss on sale of trading securities Trading securities
Interest income (2,000,000 x 12% x 1/12)
300,000
1,900,000 200,000
300,000
2,080,000 20,000
Selling price (2,040,000 – 160,000)
Less: Cost of bonds sold (2,000/5,000 x 5,200,000) Loss on sale
1,880,000 2
, 08 0 , 0 0 0 ( 200 , 00 0 )
155
Dec. 31 Cash (2,000,000 x 12% x 6/12) Interest income
31 Accrued interest receivable (3,000,000 x 12% x 2/12) Interest income
31 Unrealized loss – TS Trading securities
120,000
60,000
160,000
120,000
60,000
160,000
Carrying amount Market Acme bonds (3,000,000 x 98%)
Avco bonds (2,000,000 x 99%) 3,120,000
1
, 96 0 , 0 0 0 5
, 08 0 , 0 00
2,940,000 1
, 98 0 , 000 4
,9 2 0 , 000 Current assets:
Trading securities, at market value 4,920,000
Problem 12-5 Requirement a
March 1 Trading securities (2,000,000 x 93%) Interest income (2,000,000 x 12% x 1/12)
Cash
1,860,000 20,000
1,880,000 April 1 Trading securities (4,000,000 x 95%)
Interest income (4,000,000 x 12% x 1/12) Cash
Aug. 1 Cash (2,000,000 x 12% x 6/12) Interest income
3,800,000 40,000
120,000
3,840,000
120,000
Sept. 1 Cash (4,000,000 x 12% x 6/12)
Interest income 240,000
240,000 Oct. 1 Cash (1,010,000 + 10,000)
Interest income (1,000,000 x 12% x 1/12) Trading securities
Gain on sale of trading securities
1,020,000
10,000 950,000 60,000 Sales price (1,000,000 x 105%)
Less: Brokerage Net proceeds
Less: Cost of bonds sold (1,000/4,000 x 3,800,000) Gain on sale
1,050,000 4 0 , 000 1,010,000 9 50 , 000 6 0 , 000
156
Dec. 1 Cash (1,940,000 + 80,000) Trading securities
Interest income (2,000,000 x 12% x 4/12) Gain on sale of trading securities
2,020,000
1,860,000 80,000 80,000 Sales price (2,000,000 x 100%)
Less: Brokerage Net proceeds
Less: Cost of bonds sold Gain on sale
2,000,000 6 0 , 000 1,940,000 1
, 86 0 , 0 0 0 8 0 , 000 31 Accrued interest receivable (3,000,000 x 12% x 4/12) 120,000
Interest income 120,000
31 Unrealized loss – TS (2,850,000 – 2,700,000) Trading securities
150,000
150,000 Requirement b
Current assets:
Trading securities, at market value (3,000,000 x 90) 2,700,000
Problem 12-6 2008
July 1 Trading securities 2,200,000
Commission expense
Interest income (2,000,000 x 4%) Cash
Dec. 31 Unrealized loss – TS Trading securities
Market value (2,000,000 x 95) Carrying amount
Unrealized loss
31 Cash (2,000,000) x 8%) Interest income
50,000 80,000
300,000
160,000
2,330,000
300,000 1,900,000 2
, 20 0 , 0 0 0 3 00 , 000
160,000
2009
March 31 Cash
Trading securities Gain on sale of TS
Interest income (2,000,000 x 8%) x 3/12)
2,140,000
1,900,000 200,000 40,000
157
Problem 12-7 Requirement 1 Date
01/01/2008 12/31/2008 12/31/2009 12/31/2010
Interest received 160,000 160,000 160,000
Interest income 190,050 193,055 196,395
Discount amortization
30,050 33,055 36,395
Book value 1,900,500 1,930,550 1,963,605 2,000,000
Requirement 2 2008
Jan. 1 Available for sale securities
Cash 1,900,500
1,900,500 Dec. 31 Cash
Interest income
31 Available for sale securities Interest income
31 Available for sale securities Unrealized gain – AFS
160,000
30,050
269,450
160,000
30,050
269,450
Market value (2,000,000 x 110) Carrying amount
Unrealized gain
2,200,000 1
, 93 0 , 5 5 0 269 , 450 2009
Dec. 31 Cash
Interest income
31 Available for sale securities Interest income
31 Available for sale securities Unrealized gain
160,000
33,055
166,945
160,000
33,050
166,945
Market value 12/31/2009 (2,000,000 x 120) Book value per table – 12/31/2009 Cumulative unrealized gain – 12/31/2009 Unrealized gain – 12/31/2008
Increase in 2009
2,400,000 1
, 96 3 , 6 0 5 436,395 26 9 , 450 166 , 945
158
Jan. 1 Available for sale securities
Cash 4,742,000
4,742,000 Dec. 31 Cash
Interest income
31 Available for sale securities Interest income
31 Available for sale securities Unrealized gain – AFS
300,000
Market value - 12/31/2008 (5,000,000 x 105) Book value – 12/31/2008
Unrealized gain – 12/31/2008
5,250,000
31 Available for sale securities Interest income
31 Cash
Unrealized gain - AFS
Available for sale securities Gain on sale of AFS
300,000
Sales price (5,000,000 x 110) Unrealized gain
Total
Investment balance – 12/31/2009 Unrealized gain – 12/31/2009
5,250,000
159
Another computation Sales price
Book value per table – 12/31/2009 Gain on sale
5,250,000 4
, 90 7 , 0 6 9 592 , 931
Problem 12-9
Requirement a 2008
May 1 Held to maturity securities (6,000,000 x 94%) 5,640,000 Interest income (6,000,000 x 12% x 3/12)
Cash 180,000
5,820,000 Aug. 1 Cash
Interest income (6,000,000 x 12% x 6/12)
360,000
360,000 Dec. 31 Accrued interest receivable
Interest income (6,000,000 x 12% x 5/12) 31 Held to maturity securities (8,000 x 8)
Interest income
300,000
64,000
300,000
64,000
May 1, 2008 – February 1, 2012 = 360,000 / 45 =
45 months
8,000 monthly amortization
Requirement b 2010
May 1 Held to maturity securities (8,000 x 4) 32,000
Interest income 32,000
1 Cash (6,300,000 + 180,000) Held to maturity securities
Interest income (6,000,000 x 12% x 3/12) Gain on sale of bonds
6,480,000
5,832,000 180,000 468,000 Original cost – May 1, 2008
Add: Discount amortization from May 1, 2008 to May 1, 2010 (8,000 x 24 months)
Book value, May 1, 2010 Selling price (6,000,000 x 105%) Less: Book value
Gain on sale
5,640,000 19 2 , 000 5
, 83 2 , 0 00 6,300,000 5
, 83 2 , 0 0 0 468 , 000
160
Problem 12-10
1. Held to maturity securities Cash
2. Cash (12% x 8,000,000) Interest income 3. Interest income
Held to maturity securities
8,598,400
960,000
100,160
8,598,400
960,000
100,160
Interest received
Interest income (10% x 8,598,400) Premium amortization
960,000 859 , 840 100 , 1 6 0
Problem 12-11
Year Bond outstanding
2008 1,000,000 2009 800,000 2010 600,000 2011 400,000 2012 2 00 , 000
3
, 00 0 , 000
Fraction 10/30
8/30 6/30 4/30 2/30
Premium amortization 50,000
40,000 30,000 20,000 10 , 000 150 , 000
2008
Jan. 1 Held to maturity securities Cash
1,000,000
1,000,000
June 30 Cash (100,000 x 12% x 6/12) Interest income Dec. 31 Cash
Interest income 31 Interest income
Held to maturity securities
31 Cash
Held to maturity securities
60,000
60,000
50,000
200,000
60,000
60,000
50,000
200,000
161
2009
June 30 Cash (800,000 x 12% x 6/12) 48,000
Interest income 48,000
Dec. 31 Cash 48,000
Interest income 48,000
31 Interest income
Held to maturity securities 31 Cash
Held to maturity securities
40,000
200,000
40,000
200,000
Problem 12-12
Year Bond outstanding
2008 4,000,000 2009 3,000,000 2010 2,000,000 2011 1 , 00 0 , 000
10
, 00 0 , 000
Fraction 4/10 3/10 2/10 1/10
Discount amortization 120,000
90,000 60,000 3 0 , 000 30 0 , 000 2010
Dec. 31 Cash
Interest income 31 Held to maturity securities
Interest income 31 Cash
Held to maturity securities 2011
Dec. 31 Cash
Interest income 31 Held to maturity securities
Interest income 31 Cash
Held to maturity securities
240,000
60,000
1,000,000
120,000
30,000
1,000,000
240,000
60,000
1,000,000
120,000
30,000
1,000,000
162
Problem 12-13
Bond Bond year outstanding
Months Peso outstanding months
Discount Fraction amortization 10/01/2008 – 02/01/2009
02/01/2009 - 02/01/2010 02/01/2010 – 02/01/2011
3,000,000 2,000,000 1,000,000
4 12,000,000 12/48
12 24,000,000 24/48
12 12 , 000 , 000 12/48
4
8 , 00 0 , 000
75,000 150,000 75 , 000 300 , 000
2008
Oct. 1 Held to maturity securities
Interest income (3,000,000 x 12% x 2/12) Cash
2,700,000 60,000
2,760,000 Dec. 31 Accrued interest receivable
Interest income (3,000,000 x 12% x 5/12) 31 Held to maturity securities
Interest income (75,000 x 3/4)
150,000
56,250
150,000
56,250
2009
Jan. 1 Interest income
Accrued interest receivable Feb. 1 Cash (3,000,000 x 12% x 6/12)
Interest income
150,000
180,000
150,000
180,000
1 Cash 1,000,000
Held to maturity securities 1,000,000
Aug. 1 Cash (2,000,000 x 12% x 6/12)
Interest income 120,000
120,000 Dec. 31 Accrued interest receivable
Interest income (2,000,000 x 12% x 5/12) 31 Held to maturity securities
Interest income
100,000
156,250
100,000
156,250
From January1 to February 1, 2009 (75,000 x 1/4)
From February 1 to December 31, 2009 (150,000 x 11/12) Total amortization for year 2009
18,750 137 , 500 156 , 250
163
Jan. 1 Held to maturity securities Cash
3,757,015
3,757,015
Dec. 31 Cash 400,000
Interest income 400,000
31 Held to maturity securities 50,842
Interest income 50,842
Jan. 1 Held to maturity securities
Cash 3,111,510 30 Interest income
Held to maturity securities Dec. 31 Cash
Interest income 31 Interest income
Held to maturity securities
26,655
164
Problem 12-16 1. Journal entries
a. Held to maturity securities Cash
b. Cash (10% x 8,000,000) Interest income
7,679,000
800,000
7,679,000
800,000
c. Held to maturity securities Interest income
121,480
121,480 Interest income (7,679,000 x 12%)
Interest received (8,000,000 x 10%) Discount amortization
921,480 800 , 000 121 , 480 d. Cash
Held to maturity securities
2,000,000
2,000,000 2. Cost
Discount amortization Annual installment Book value – 12/31/2008
7,769,000 121,480 ( 2,00 0 , 0 0 0 )
5
, 80 0 , 4 80 Problem 12-17
Semiannual nominal interest (5,000,000 x 4%) Semiannual effective interest (5,000,000 x 5%) Difference
Multiply by present value of annuity of 1 for 20 periods at 5%
Discount Face value Discount Purchase price
200,000 250 , 000
50,000 1 2 . 462 623 , 1 0 0 5,000,000 ( 62 3 , 1 00 )
4
, 37 6 , 9 00 Problem 12-18
1. Annual nominal interest (4,000,000 x 16%) Annual effective interest (4,000,000 x 12%) Difference
Multiply by present value factor Premium
Face value Purchase price
640,000 48 0 , 000 160,000
3 .605 576,800 4
, 00 0 , 0 0 0 4
, 57 6 , 8 00
165
3. Held to maturity securitiesCash Cash
Interest income Interest income
Held to maturity securities
4,576,800
Semiannual nominal interest (8,000,000 x 5%) Semiannual effective interest (8,000,000 x 4%) Difference
Multiply by PV of annuity of 1 for 10 periods at 4%
Premium The amount of P648,800 is a premium because the effective rate is lower than
nominal rate.
Another approach
PV of principal (8,000,000 x .6756)
PV of semiannual interest payments (400,000 x 8.11) Purchase price or present value of bonds
5,404,800
Jan. 1 Held to maturity securities Cash
1 Interest income 54,048
Held to maturity securities 54,048
166
Interest received
Interest income (8,648,800 x 8% x 6/12) Premium amortization
400,000 345 , 952 5 4 , 048 Dec. 31 Accrued interest receivable
Interest income 31 Interest income
Held to maturity securities
400,000
56,210
400,000
56,210
Interest accrued
Interest income (8,594,752 x 8% x 6/12) Premium amortization
400,000 343 , 790 5 6 , 210
Problem 12-20