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CHAPTER 11

139

Problem 11-1

 

Problem 11-2

Problem 11-3

Problem 11-4

1. A

6.

A

1.

B

1.

D

1.

B

2. C

7.

C

2.

D

2.

D

2.

C

3. C

8.

A

3.

B

3.

C

3.

D

4. A

9.

D

4.

A

4.

A

4.

A

5. D

10.

B

5.

C

5.

C

5.

A

Problem 11-5

 
 

Equity method

 

1. Investment in associate Cash

2,400,000

2,400,000

Acquisition cost Net assets acquired (20% x 8,000,000) Goodwill

2,400,000

1,600,000

800,000

2. Investment in associate Investment income (20% x 1,500,000)

300,000

300,000

3. Memo – Received 2,000 shares as 10% stock dividend on 20,000 original shares. Shares now held, 22,000.

4. Investment loss Investment in associate (20% x 300,000)

60,000

60,000

5. Cash (20% x 500,000) Investment in associate

6. Cash (5,500 x 200) Investment in associate Gain on sale of investment

100,000

1,100,000

100,000

635,000

465,000

Sales price

1,100,000

Less: Cost of investment sold (5,500/22,000 x 2,540,000) Gain on sale

 

635,000

465,000

Cost method

1. Investment in equity securities Cash

2,400,000

2,400,000

140

3. Memo – Received 2,000 shares as 10% stock dividend. Shares now held, 22,000.

4. No entry

5. Cash

6. Cash

100,000

Dividend income

1,100,000

100,000

Investment in equity securities (5,500/22,000 x 2,400,000)

600,000

Gain on sale of investment

500,000

Problem 11-6

1. Investment in equity securities Cash

6,000,000

6,000,000

2. Cash (15% x 4,000,000)

600,000

Dividend income (15% x 3,000,000)

450,000

Investment in equity securities (15% x 1,000,000)

150,000

Problem 11-7

2008 Investment in associate Cash

5,000,000

5,000,000

Investment in associate Investment income (30% x 4,000,000 x 3/12)

300,000

300,000

Cash (30% x 3,000,000) Investment in associate

900,000

900,000

Investment income Investment in associate (200,000 x 3/12)

50,000

50,000

2009 Investment in associate Investment income (30% x 6,000,000)

1,800,000

1,800,000

Cash (30% x 5,000,000) Investment in associate

1,500,000

1,500,000

Investment income Investment in associate

200,000

200,000

Problem 11-8

141

2006

Jan.

1

Investment in equity securities Cash

1,000,000

1,000,000

Dec. 31

Cash (15% x 300,000) Dividend income

45,000

45,000

2007

Dec. 31

Cash (15% x 400,000) Dividend income

60,000

60,000

2008

Jan.

1

Investment in associate Cash

3,000,000

3,000,000

1

Investment in associate Retained earnings

75,000

75,000

 

Investment income – Equity method (2006 and 2007) (15% x 500,000 + 700,000) Dividend income – Cost method (2006 and 2007) (45,000 + 60,000) Cumulative effect of change to equity

180,000

105,000

75,000

 

1

Investment in associate Investment in equity securities (Reclassification)

1,000,000

1,000,000

Dec. 31 Investment in associate Investment income (40% x 900,000)

360,000

360,000

 

31

Cash (40% x 600,000) Investment in associate

240,000

240,000

Problem 11-9

 

2008

Jan.

1

Investment in associate Cash

8,000,000

8,000,000

Dec. 31

Investment in associate Investment income (30% x 5,000,000)

1,500,000

1,500,000

 

31

Cash (30% x 2,000,000) Investment in associate

600,000

600,000

142

2009

June 30

Investment in associate Investment income (30% x 6,000,000)

1,800,000

1,800,000

July

1

Cash Investment in associate (10,700,000 x 1/2) Gain on sale of investment

6,000,000

   

5,350,000

650,000

Oct.

1

Cash (2,500,000 x 15%) Dividend income

375,000

375,000

1

Available for sale securities Investment in associate (Reclassification)

5,350,000

5,350,000

Dec. 31

No entry is required for the share in net income because the investor is now using the fair value method by reason on the reduced 15% interest.

Problem 11-10

 

Requirement a

 

1. Investment in associate Cash

3,500,000

3,500,000

2. Investment in associate Investment income (40% x 4,000,000)

1,600,000

1,600,000

3. Cash (40% x 1,000,000) Investment in associate

400,000

400,000

4. Investment income Investment in associate (600,000 / 4)

150,000

150,000

Cost Book value of interest acquired (40% x 7,000,000) Excess of cost over book value Excess attributable to equipment (40% x 1,500,000)

3,500,000

2,800,000

700,000

 

(

600,000)

Excess attributable to inventory (40% x 500,000) Excess net fair value over cost

(

200,000)

(

100,000)

5. Investment income Investment in associate

200,000

200,000

6. Investment in associate Investment income

100,000

100,000

Requirement b

143

Share in net income Amortization of excess attributable to equipment Amortization of excess attributable to inventory

 

1,600,000

 

(

150,000)

(

200,000)

Excess net fair value over cost Net investment income

 

100,000

1,350,000

Problem 11-11

1. Investment in associate Cash

1,700,000

1,700,000

2. Investment in associate Investment income (40% x 650,000)

260,000

260,000

3. Cash (40% x 150,000) Investment in associate

60,000

60,000

4. Investment in associate Revaluation surplus – investee (40% x 1,300,000)

520,000

520,000

Note:

1. Cost Interest acquired (40% x 4,000,000) Goodwill – not amortized

 

1,700,000

1,600,000

100,000

2. There is no need to adjust for the difference in depreciation method. If both entities a method that best reflects the flow of benefits as the assets are consumed, then there is no policy difference.

Problem 11-12

1. Journal entries

a. Investment in associate Cash

6,000,000

6,000,000

b. Investment in associate Investment income

750,000

750,000

c. Cash Investment in associate

450,000

450,000

d. Investment income Investment in associate

200,000

200,000

144

2. Share in net income Amortization of patent (2,000,000 / 10) Investment income

 

750,000

(200,000)

550,000

3. Acquisition cost Share in net income (5,000,000 x 15%) Share in cash dividend (3,000,000 x 15%)

 

6,000,000

 
 

750,000

 

(

450,000)

Amortization of patent (2,000,000 / 10) Carrying value

(

200,000)

 

6,100,000

 

Interest acquired (30,000 / 200,000)

15%

Acquisition cost Book value of net assets acquired Excess of cost applicable to patent

 

6,000,000

 

4,000,000

2,000,000

Problem 11-13

1. Journal entries

a. Investment in associate Cash

5,000,000

5,000,000

b. Investment in associate Investment income

1,200,000

1,200,000

c. Cash Investment in associate

300,000

300,000

d. Investment income Investment in associate

150,000

150,000

2. Share in net income

1,200,000

Amortization of depreciable asset (750,000 / 5) Investment income

 

(

150,000)

 

1,050,000

3. Acquisition cost Share in net income (30% x 4,000,000) Share in cash dividend (30% x 1,000,000)

 

5,000,000

 

1,200,000

 

(

300,000)

Amortization of depreciable asset (750,000 / 5) Carrying value of investment

(

150,000)

 

5,750,000

 

Acquisition cost Net assets acquired (30% x 12,000,000) Excess of cost Excess attributable to depreciable asset (30% x 2,500,000) Excess attributable to goodwill

5,000,000

3,600,000

1,400,000

 

750,000

650,000

Problem 11-14

1. Journal entries

145

a. Investment in associate Cash

1,000,000

1,000,000

b. Investment in associate Investment income

175,000

175,000

c. Cash Investment in associate

75,000

75,000

d. Investment income Investment in associate

50,000

50,000

2. Share in net income Amortization of excess (25,000 + 25,000) Investment income

175,000

( 50,000)

125,000

3. Acquisition cost

1,000,000

Net assets acquired (25% x 3,000,000) Excess of cost

 

750,000

250,000

Excess attributable to inventory (25% x 100,000) Excess attributable to equipment (25% x 500,000) Excess attributable to goodwill (25% x 400,000)

25,000

125,000

100,000

 

250,000

Acquisition cost Share in net income (25% x 700,000) Amortization of excess:

 

1,000,000

175,000

 

Inventory Equipment (125,000 / 5)

(

25,000)

(

25,000)

Cash dividend (25,000 x 3) Investment balance

(

75,000)

1,050,000

Problem 11-15

 

1.

Share in 2008 net income

900,000

Amortization of excess (400,000 / 20) Investment income for 2008

 

(

20,000)

880,000

Acquisition cost (20,000 x 120) Net assets acquired (25% x 8,000,000) Excess of cost

2,400,000

2,000,000

400,000

146

2. Share in 2008 net income

 

975,000

Amortization of excess Investment income for 2009

 

(

20,000)

 

955,000

3. Acquisition cost Share in net income:

 

2,400,000

2008 (25% x 3,600,000)

 

900,000

2009 (25% x 3,900,000)

975,000

Share in cash dividend:

 

2008 (20,000 x 16)

(

320,000)

2009 (20,000 x 20)

(

400,000)

Amortization of excess:

 

2008

(400,000 / 20)

(

20,000)

2009

(

20,000)

Investment balance – 12/31/2009

Problem 11-16

Requirement a

3,515,000

1. Memo – Received 500 shares as 10% stock dividend on 5,000 original Dale ordinary shares. Shares now held, 5,500.

2. Cash (5,500 x 20) Dividend income

110,000

110,000

3. Stock rights (15/150 x 1,600,000) Investment in equity securities – Ever

160,000

160,000

Cash Stock rights Gain on sale of stock rights

200,000

 

160,000

40,000

4. Investment in associate Cash

5,000,000

5,000,000

1/1/2007

1/1/2008

Acquisition cost Net assets acquired:

2,000,000

5,000,000

10% x 16,000,000 20% x 20,000,000 Goodwill

1,600,000

 

4,000,000

400,000

1,000,000

Income from Fox investment in 2007 (10% x 4,000,000) Less: Dividend income recorded in 2007 – cost method Understatement of income

400,000

-

400,000

147

5. Investment in associate Investment in equity securities (Reclassification)

2,000,000

2,000,000

6. Investment in associate Retained earnings

400,000

400,000

7. Investment in associate Investment income (30% x 6,000,000)

1,800,000

1,800,000

8. Cash (75,000 x 20) Investment in associate

Requirement b

1,500,000

 

1,500,000

Noncurrent assets:

Investment in equity securities (Note) Investment in associate – Fox Corporation

 

2,690,000

7,700,000

Note – Investment in equity securities

Dale Corporation, 5,500 shares Ever Corporation, 10,000 shares Total cost

 

1,250,000

1,440,000

2,690,000

Problem 11-17 Answer D

Problem 11-18 Answer D

Problem 11-19 Answer B

Investment in Lax Corporation

3,000,000

Problem 11-20 Answer C

Total cash dividend Cumulative net income Liquidating dividend

 

3,000,000

2,500,000

500,000

Cash (10% x 3,000,000) Dividend income (10% x 2,500,000) Investment in equity securities

300,000

 

250,000

50,000

Problem 11-21 Answer B

Problem 11-22 Answer A

148

Investment income (20% x 6,000,000)

1,200,000

Problem 11-23 Answer C

Interest (30,000/100,000)

30%

Investment income (5,000,000 x 6/12 x 30%)

750,000

Problem 11-24 Answer C

Cost Less: Net assets acquired (40% x 8,000,000) Excess of cost or goodwill

4,000,000

3,200,000

800,000

Share in net income from April 1 to December 31 (1,000,000 x 9/12 x 40%)

300,000

Problem 11-25 Answer B

Acquisition cost Share in net income (20% x 1,800,000) Share in cash dividend (20% x 600,000)

(

7,000,000

360,000

120,000)

Amortization of excess (1,000,000/10) Carrying value

(

100,000)

7,140,000

Problem 11-26 Answer A

Acquisition cost Share in net income (10% x 5,000,000)

4,000,000

500,000

Share in cash dividend (10% x 1,500,000) Carrying value

(

150,000)

4,350,000

Problem 11-27 Answer D

Acquisition cost (squeeze) Share in net income (25% x 1,200,000)

1,720,000

300,000

Share in cash dividend (25% x 480,000) Carrying value – December 31

(

120,000)

1,900,000

Problem 11-28 Answer D

Acquisition cost Less: Book value of net assets acquired (30% x 5,000,000) Excess of cost over book value Less: Amount attributable to undervaluation of land (30% x 2,000,000) Goodwill

2,500,000

1,500,000

1,000,000

600,000

400,000

149

Acquisition cost

2,500,000

Add: Share in net income (30% x 1,000,000) Balance, December 31

 

300,000

 

2,800,000

The excess of cost attributable to the land is not amortized because the land is nondepreciable. The goodwill is not amortized.

Problem 11-29 Answer B

Acquisition cost – January 1 Acquisition cost – December 31 Total cost

 

1,000,000

3,000,000

4,000,000

Share in net income (10% x 8,000,000) Carrying value

800,000

4,800,000

Problem 11-30 Answer C

Investment income in 2008 (30% x 6,500,000)

1,950,000

Investment income in 2007 (10% x 6,000,000) Less: Dividend income recorded in 2006 (10% x 2,000,000) Understatement of income

 

600,000

200,000

400,000

Investment in associate Retained earnings

400,000

400,000

Problem 11-31 Answer A

Acquisition cost Net assets acquired (30% x 11,800,000) Excess of cost

 

5,160,000

3,540,000

 

1,620,000

Attributable to depreciable assets (30% x 2,600,000) Attributable to goodwill

780,000

840,000

Acquisition cost Share in net income (30% x 3,600,000) Share in dividends (30% x 400,000) Amortization (780,000/4) Investment balance – December 31

 

5,160,000

 

1,080,000

 

( 120,000)

( 195,000)

5,925,000

Problem 11-32 Answer B

Acquisition cost Net assets acquired (40% x 5,000,000) Excess of cost

 

2,560,000

2,000,000

 

560,000

150

Attributable to equipment (40% x 800,000) Attributable to building (40% x 600,000)

 

320,000

240,000

 

560,000

Acquisition cost Net income (40% x 1,600,000) Cash dividend (40% x 1,000,000) Amortization of excess:

 

2,560,000

640,000

(

400,000)

Equipment (320,000 / 4)

(

80,000)

Building (240,000 / 12) Carrying value of investment – 12/31/2008

(

20,000)

2,700,000

Problem 11-33 Answer A

Net income

5,000,000

Less: Preference dividend (10% x 2,000,000) Net income to ordinary shares

 

200,000

4,800,000

Investment income (50% x 4,800,000)

2,400,000

Problem 11-34

Question 1 – Answer B

Share in 2008 net income (30% x 800,000)

240,000

Question 2 – Answer B

Acquisition cost Share in net income – 2008

 

2,000,000

240,000

Cash dividends – 2008 (30% x 500,000) Book value – December 31, 2008

(

150,000)

2,090,000

Question 3 – Answer B

Book value – December 31, 2008

2,090,000

Share in net income up to June 30, 2009 (30% x 1,000,000) Book value – June 30, 2009

 

300,000

2,390,000

Sales price Book value sold (2,390,000 x ½) Gain on sale

1,500,000

1,195,000

305,000

Problem 11-35 Answer C

151

Acquisition cost (30,000 x 120) 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)

(

3,600,000

150,000)

3,450,000

210,000

240,000

Cash dividend on 12/31/2009 (30% x 400,000) Carrying value of investment – 12/31/2009

(

120,000)

3,780,000

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

180,000

3,780,000

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

2008

CHAPTER 12

Bonds held as trading

152

April

1

Trading securities Cash

2,200,000

2,200,000

Oct.

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 3/12)

60,000

60,000

 

31

Trading securities Unrealized gain – TS

100,000

100,000

2009

Jan.

1

Interest income Accrued interest receivable

60,000

60,000

April

1

Cash Interest income

120,000

120,000

Oct.

1

Cash Interest income

120,000

120,000

Dec. 31

Accrued interest receivable Interest income

60,000

60,000

 

31

Unrealized loss – TS Trading securities (2,300,000 – 1,960,000)

340,000

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 Interest income

60,000

60,000

 

31

Interest income (50,000 x 9/12) Held to maturity securities

37,500

37,500

2009

Jan.

1

Interest income Accrued interest receivable

60,000

60,000

April

1

Cash Interest income

120,000

120,000

Oct.

1

Cash Interest income

120,000

120,000

Dec. 31

Accrued interest receivable Interest income

60,000

60,000

 

31

Interest income (200,000/4) Held to maturity securities

50,000

50,000

Problem 12-3

 
 

Bonds held as trading

Jan.

1

Trading securities Cash

3,761,000

3,761,000

July

1

Cash Interest income (4,000,000 x 12%)

240,000

240,000

Dec. 31

Accrued interest receivable Interest income

240,000

240,000

 

31

Trading securities Unrealized gain – TS (4,200,000 – 3,761,000)

439,000

439,000

 

Bonds held as available for sale

Jan.

1

Available for sale securities Cash

3,761,000

3,761,000

July

1

Cash Interest income

240,000

240,000

154

July

1

Available for sale securities Interest income

23,270

23,270

Interest income (3,761,000 x 7%) Interest received Amortization of discount

263,270

240,000

23,270

Dec. 31 Accrued interest receivable Interest income

240,000

240,000

31

Available for sale securities Interest income

24,899

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

3,809,169

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

5,200,000

150,000

 

5,350,000

31

Trading securities (2,000,000 x 98) Interest income (2,000,000 x 12% x 2/12) Cash

1,960,000

40,000

 

2,000,000

Nov. 1

Cash (5,000,000 x 12% x 6/12) Interest income

300,000

300,000

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)

1,900,000

200,000

 

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

2,080,000

( 200,000)

155

Dec. 31 Cash (2,000,000 x 12% x 6/12) Interest income

120,000

120,000

 

31

Accrued interest receivable (3,000,000 x 12% x 2/12) Interest income

60,000

60,000

31

Unrealized loss – TS Trading securities

160,000

160,000

 

Carrying amount

Market

Acme bonds (3,000,000 x 98%) Avco bonds (2,000,000 x 99%)

3,120,000

2,940,000

1,960,000

1,980,000

 

5,080,000

4,920,000

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

3,800,000

 

40,000

 

3,840,000

Aug.

1

Cash (2,000,000 x 12% x 6/12) Interest income

120,000

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%)

1,050,000

Less: Brokerage Net proceeds Less: Cost of bonds sold (1,000/4,000 x 3,800,000) Gain on sale

 

40,000

1,010,000

950,000

60,000

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%)

2,000,000

Less: Brokerage Net proceeds Less: Cost of bonds sold Gain on sale

 

60,000

1,940,000

1,860,000

80,000

31

Accrued interest receivable (3,000,000 x 12% x 4/12) Interest income

120,000

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 Commission expense Interest income (2,000,000 x 4%) Cash

2,200,000

50,000

80,000

 

2,330,000

Dec. 31 Unrealized loss – TS Trading securities

300,000

 

300,000

1,900,000

 

Market value (2,000,000 x 95) Carrying amount Unrealized loss

2,200,000

300,000

31

Cash (2,000,000) x 8%) Interest income

160,000

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

Problem 12-7

157

Requirement 1

 
 

Discount

Date

Interest received

Interest income

amortization

Book value

01/01/2008

 

1,900,500

12/31/2008

160,000

190,050

30,050

1,930,550

12/31/2009

160,000

193,055

33,055

1,963,605

12/31/2010

160,000

196,395

36,395

2,000,000

Requirement 2

 

2008

Jan.

1

Available for sale securities Cash

1,900,500

1,900,500

Dec. 31

Cash Interest income

160,000

160,000

 

31

Available for sale securities Interest income

30,050

30,050

31

Available for sale securities Unrealized gain – AFS

269,450

269,450

 

Market value (2,000,000 x 110) Carrying amount Unrealized gain

 

2,200,000

1,930,550

269,450

2009

Dec. 31

Cash Interest income

160,000

160,000

 

31

Available for sale securities Interest income

33,055

33,050

31

Available for sale securities Unrealized gain

166,945

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

2,400,000

1,963,605

436,395

Unrealized gain – 12/31/2008 Increase in 2009

 

269,450

166,945

Problem 12-8

158

Requirement 1

 
 

Discount

Date

Interest received

Interest income

amortization

Book value

01/01/2008

 

4,742,000

12/31/2008

300,000

379,360

79,360

4,821,360

12/31/2009

300,000

385,709

85,709

4,907,069

12/31/2010

300,000

392,931

92,931

5,000,000

Requirement 2

 

2008

Jan.

1

Available for sale securities Cash

4,742,000

4,742,000

Dec. 31

Cash Interest income

300,000

300,000

 

31

Available for sale securities Interest income

79,360

79,360

31

Available for sale securities Unrealized gain – AFS

428,640

428,640

 

Market value - 12/31/2008 (5,000,000 x 105) Book value – 12/31/2008 Unrealized gain – 12/31/2008

5,250,000

4,821,360

428,640

2009

Dec. 31

Cash Interest income

300,000

300,000

 

31

Available for sale securities Interest income

85,709

85,709

31

Cash Unrealized gain - AFS Available for sale securities Gain on sale of AFS

 

5,500,000

 

428,640

 

5,335,709

592,931

Sales price (5,000,000 x 110)

5,250,000

Unrealized gain Total Investment balance – 12/31/2009 Unrealized gain – 12/31/2009

 

428,640

5,928,640

5,335,709

592,931

Another computation

159

 

Sales price Book value per table – 12/31/2009 Gain on sale

 

5,250,000

4,907,069

592,931

Problem 12-9

 
 

Requirement a

2008

May

1

Held to maturity securities (6,000,000 x 94%) Interest income (6,000,000 x 12% x 3/12) Cash

5,640,000

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)

300,000

300,000

31

Held to maturity securities (8,000 x 8) Interest income

64,000

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) Interest income

32,000

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

5,640,000

May 1, 2010 (8,000 x 24 months) Book value, May 1, 2010

 

192,000

5,832,000

Selling price (6,000,000 x 105%) Less: Book value Gain on sale

6,300,000

5,832,000

468,000

Problem 12-10

160

1. Held to maturity securities Cash

8,598,400

8,598,400

2. Cash (12% x 8,000,000) Interest income

960,000

960,000

3. Interest income Held to maturity securities

100,160

100,160

Interest received

960,000

Interest income (10% x 8,598,400)

859,840

Premium amortization

100,160

Problem 12-11

Year

Bond outstanding

Fraction

Premium amortization

2008

1,000,000

10/30

50,000

2009

800,000

8/30

40,000

2010

600,000

6/30

30,000

2011

400,000

4/30

20,000

2012

200,000

2/30

10,000

2008

3,000,000

150,000

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

60,000

60,000

Dec. 31

Cash

60,000

Interest income

60,000

 

31

Interest income Held to maturity securities

50,000

50,000

31

Cash

200,000

 

Held to maturity securities

200,000

161

2009

June 30

Cash (800,000 x 12% x 6/12) Interest income

48,000

48,000

Dec. 31

Cash Interest income

48,000

48,000

31

Interest income Held to maturity securities

40,000

40,000

31

Cash Held to maturity securities

200,000

200,000

Problem 12-12

Year

Bond outstanding

Fraction

Discount amortization

2008

4,000,000

4/10

120,000

2009

3,000,000

3/10

90,000

2010

2,000,000

2/10

60,000

2011

1,000,000

1/10

30,000

10,000,000

300,000

2010

Dec. 31

Cash Interest income

240,000

240,000

31

Held to maturity securities Interest income

60,000

60,000

31

Cash Held to maturity securities

1,000,000

1,000,000

2011

Dec. 31

Cash Interest income

120,000

120,000

31

Held to maturity securities Interest income

30,000

30,000

31

Cash Held to maturity securities

1,000,000

1,000,000

Problem 12-13

Bond

Months

Peso

162

Discount

Bond year 10/01/2008 – 02/01/2009 02/01/2009 - 02/01/2010 02/01/2010 – 02/01/2011

outstanding

outstanding

months

Fraction

amortization

3,000,000

4

12,000,000

12/48

75,000

2,000,000

12

24,000,000

24/48

150,000

1,000,000

12

12,000,000

12/48

75,000

 

48,000,000

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)

 

150,000

150,000

31

Held to maturity securities Interest income (75,000 x 3/4)

56,250

56,250

2009

Jan.

1

Interest income Accrued interest receivable

 

150,000

150,000

Feb.

1

Cash (3,000,000 x 12% x 6/12) Interest income

 

180,000

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)

 

100,000

100,000

31

Held to maturity securities Interest income

 

156,250

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

Problem 12-14

163

Date

 

Interest received

Interest income

Discount amortization

Book value

01/01/2008

 

3,757,015

12/31/2008

400,000

450,842

50,842

3,807,857

12/31/2009

400,000

456,943

56,943

3,864,800

12/31/2010

400,000

463,776

63,776

3,928,576

12/31/2011

400,000

471,424

71,424

4,000,000

2008

 

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 Interest income

 

50,842

50,842

Problem 12-15

Date

Interest received

Interest income

Premium amortization

Carrying value

Jan. 01, 2008

 

3,111,510

June 30, 2008

120,000

93,345

26,655

3,084,855

Dec. 31, 2008

120,000

92,546

27,454

3,057,401

June 30, 2009

120,000

91,722

28,278

3,029,123

Dec. 31, 2009

120,000

90,877

29,123

3,000,000

2008

Jan.

1

Held to maturity securities Cash

3,111,510

3,111,510

June 30

Cash

120,000

 

Interest income

120,000

30

Interest income Held to maturity securities

26,655

26,655

Dec. 31

Cash

120,000

 

Interest income

120,000

31

Interest income Held to maturity securities

27,454

27,454

Problem 12-16

1. Journal entries

164

 

a. Held to maturity securities Cash

7,679,000

7,679,000

b. Cash (10% x 8,000,000) Interest income

800,000

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

(2,000,000)

5,800,480

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

 

200,000

250,000

50,000

12.462

623,100

Face value

 

5,000,000

Discount

 

(

623,100)

Purchase price

 

4,376,900

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

480,000

160,000

3.605

576,800

4,000,000

4,576,800

165

2. Date Jan. 01, 2008 Dec. 31, 2008 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2011 Dec. 31. 2012

Interest received

Interest income

Premium amortization

Book value

 

4,576,800

640,000

549,216

90,784

4,486,016

640,000

538,322

101,678

4,384,338

640,000

526,121

113,879

4,270,459

640,000

512,455

127,545

4,142,914

640,000

497,086

142,914

4,000,000

3. Held to maturity securities Cash

4,576,800

4,576,800

Cash

 

640,000

 

Interest income

 

640,000

Interest income Held to maturity securities

Problem 12-19

 

90,784

 

90,784

Semiannual nominal interest (8,000,000 x 5%)

 

400,000

Semiannual effective interest (8,000,000 x 4%) Difference

320,000

80,000

Multiply by PV of annuity of 1 for 10 periods at 4% Premium Face value Purchase price

8.11

648,800

8,000,000

8,648,800

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

3,244,000

8,648,800

Journal entries

 

2008

Jan.

1 Held to maturity securities Cash

 

8,648,800

8,648,800

July

1 Cash Interest income

400,000

400,000

1

Interest income Held to maturity securities

54,048

54,048

166

 

Interest received Interest income (8,648,800 x 8% x 6/12) Premium amortization

 

400,000

345,952

54,048

Dec. 31

Accrued interest receivable Interest income

400,000

400,000

31

Interest income Held to maturity securities

56,210

56,210

Interest accrued Interest income (8,594,752 x 8% x 6/12) Premium amortization

400,000

343,790

56,210

Problem 12-20

 

1. Principal payment

 

1,000,000

Interest payment (3,000,000 x 12%) Total payment on December 31, 2008

 

360,000

 

1,360,000

Principal payment Interest payment (2,000,000 x 12%) Total payment on December 31, 2009

1,000,000

 

240,000

 

1,240,000

Principal payment Interest payment (1,000,000 x 12%) Total payment on December 31, 2010

1,000,000

 

120,000

 

1,120,000

December 31, 2008 payment (1,360,000 x .91) December 31, 2009 payment (1,240,000 x .83)

1,237,600

1,029,200

December 31, 2010 payment (1,120,000 x .75) Total present value on January 1, 2008

 

840,000

 

3,106,800

2. Journal entries

 

2008

Jan.

1 Held to maturity securities Cash

3,106,800

3,106,800

Dec. 31 Cash

360,000

 

Interest income

360,000

 

31

Interest income Held to maturity securities

49,320

49,320

167

 

Interest received Interest income (3,106,800 x 10%) Premium amortization

 

360,000

310,680

49,320

 

Dec. 31

Cash

1,000,000

 

Held to maturity securities

 

1,000,000

3.

Acquisition cost – 1/1/2008 Premium amortization for 2008 Annual installment Carrying value of investment – 12/31/2008

3,106,800

 

(

49,320)

(1,000,000)

 

2,057,480

Problem 12-21

 

1. The present value of the bonds using the interest rate of 11% is as follows:

 
 

PV of principal (5,000,000 x .6587) PV of interest (500,000 x 3.1024) Total present value of cash flows

 

3,293,500

1,551,200

4,844,700

2. The present value of the bonds using the interest rate of 12% is as follows:

 

PV of principal (5,000,000 x .6355) PV of interest (500,000 x 3.0373) Total present value of cash flows

 

3,177,500

1,518,650

4,696,150

3. X – 11%

 
 

12% - 11%

 

4,700,000 – 4,844,700_

 
 

4,696,150 – 4,844,700

 

_144,700_

=

.97

 

148,550

 
 

Effective rate = 11% + .97 = 11.97%

 

4. Interest income for 2008 (4,700,000 x 11.97%)

 

562,590

5. Journal entries

 
 

Held to maturity securities Cash

 

4,700,000

4,700,000

Cash (10% x 5,000,000) Interest income

500,000

500,000

168

Held to maturity securities Interest income

62,590

62,590

Interest income Interest received Discounted amortization

562,590

500,000

62,590

Problem 12-22

Question 1 – Answer A

Acquisition cost (4,400,000 – 100,000)

4,300,000

Amortization of premium from Oct. 1, 2007 to Dec. 31, 2008 (4,000 x 15) Book value – December 31, 2008

(

60,000)

4,240,000

Monthly amortization (300,000/75 months)

4,000

Question 2 – Answer B

Interest for 2008 (4,000,000 x 10%) Amortization of premium (4,000 x 12 months) Interest income

 

400,000

( 48,000)

352,000

Problem 12-23 Answer B

Interest for 2008 (2,000,000 x 12%) Amortization of discount (100,000/5) Interest income

 

240,000

20,000

260,000

Problem 12-24 Answer B

Premium on sale of bonds Unamortized discount (100,000 – 20,000) Gain on sale of bonds

 

140,000

80,000

220,000

Problem 12-25 Answer A

Acquisition cost – 1/1/2008 Discount amortization for 2008:

3,767,000

Interest income (14% x 3,767,000)

527,380

Interest received (12% x 4,000,000) Book value – 12/31/2008

480,000

47,380

3,814,380

Problem 12-26 Answer A

Bond year

Bond outstanding

Fraction

169

Amortization

04/01/2007 – 03/31/2008 04/01/2008 – 03/31/2009 04/01/2009 – 03/31/2010 04/01/2010 – 03/31/2011

4,000,000

4/10

80,000

3,000,000

3/10

60,000

2,000,000

2/10

40,000

1,000,000

1/10

20,000

 

10,000,000

200,000

Interest for the year 2008:

From January 1 to March 31, 2008 (4,000,000 x 12% x 3/12) From April 1 to December 31, 2008 (3,000,000 x 12% x 9/12) Amortization of discount for year 2008:

120,000

270,000

20,000

 
 

390,000

 

From January 1 to March 31, 2008 (80,000 x 3/12) From April 1 to December 31, 2008 (60,000 x 9/12) Interest income for year 2008

45,000

65,000

455,000

Problem 12-27 Answer D

Interest income for 2008 (3,756,000 x 10%)

375,600

Problem 12-28 Answer D

Interest accrued from July 1 to December 31, 2008 (5,000,000 x 8% x 6/12)

 

200,000

Problem 12-29 Answer C

Interest received (1,000,000 x 10% x 6/12) Interest income (1,198,000 x 8% x 6/12) Premium amortization

 

50,000

47,920

2,080

Acquisition cost – July 1, 2008

1,198,000

Premium amortization Book value – December 31, 2008

 

(

2,080)

 

1,195,920

Problem 12-30 Answer A

170

Interest accrued (1,000,000 x 8% x 6/12) Interest income (906,000 x 10% x 6/12) Discount amortization

 

40,000

45,300

5,300

Acquisition cost – July 1, 2008 (946,000 - 40,000) Discount amortization Book value – December 31, 2008

906,000

5,300

911,300

Problem 12-31 Answer B

Acquisition cost – July 1, 2008 Discount amortization from July 1 to December 31, 2008:

4,614,000

Interest accrued (5,000,000 x 8% x 6/12)

200,000

Interest income (4,614,000 x 10% x 6/12) Book value – December 31, 2008

230,700

30,700

4,644,700

Problem 12-32 Answer D

Acquisition cost Discount amortization:

4,766,000

Interest income (4,766,000 x 12%) Interest received (5,000,000 x 10%) Total Annual installment on December 31, 2008 Book value –December 31, 2008

571,920

500,000

71,920

4,837,920

(1,000,000)

3,837,920

Problem 12-33 Answer A

Annual effective (5,000,000 x 14%) Annual nominal (5,000,000 x 12%) Difference Multiply by present value factor using effective rate of 14% Discount Face value Purchase price

 

700,000

600,000

100,000

5.216

521,600

5,000,000

4,478,400

Problem 12-34 Answer A

12/31/2008 (1,250,000 + 600,000 x .9091) 12/31/2009 (1,250,000 + 450,000 x .8264) 12/31/2010 (1,250,000 + 300,000 x .7513) 12/31/2011 (1,250,000 + 150,000 x .6830)

 

1,681,835

1,404,880

1,164,515

956,200

CHAPTER 13

171

Problem 13-1

Problem 13-2

Problem 13-3

1.

C

1.

A

1.

A

2. B

2.

C

2.

A

3. D

3.

D

3.