On January 1, 2016, Ayayai and Lois Company purchased 12% bonds having a maturit
ID: 2572638 • Letter: O
Question
On January 1, 2016, Ayayai and Lois Company purchased 12% bonds having a maturity value of $222,000 for $238,830.89. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2016, and mature January 1, 2021, with interest receivable December 31 of each year. Ayayai and Lois Company uses the effective interest method to allocate unamortized discount or premium. The bonds are classified as amortized cost investments.
Prepare the journal entry at the date of the bond purchase. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 2 decimal places, e.g. 52.75.) Date Account Titles and Explanation Debit Credit Jan. 1 SHOW LIST OF ACCOUNTS
Martinez Corp., a December 31 year-end company that applies IFRS, acquired an investment of 1,100 shares of Credence Corp. in mid-2013 for $33,450. Between significant volatility in the markets and in the business prospects of Credence Corp., the accounting for this investment presented a challenge to Martinez. Toward the end of 2017, Credence discontinued the small annual dividend of $0.50 per share that it had been paying and announced that a major patent responsible for 50% of its income had lost most of its value due to a technological improvement by a competitor.
Situation 1: Credence Corp. is a publicly traded company on the Toronto Stock Exchange, and Martinez has opted to account for its investment at FV-NI. By the end of 2016, the price of Credence shares had fallen to $26.50 per share from $29 the previous year, and by the end of 2017 they were trading at $11.10.
Situation 2: Credence Corp. is a private enterprise owned by a group of 20 investors and is a supplier of materials to Martinez. Martinez purchased the shares to cement the relationship between the two companies and has opted to account for its investment at FV-OCI. In late 2016, Martinez was beginning to worry about its investment and determined that its value had probably fallen marginally to an estimated fair value of approximately $29,000 from $30,000 the previous year. In 2017, Martinez was more concerned and, at year end, carried out a thorough analysis of the present value of the likely cash flows to be derived from this investment and estimated an amount of $13,900.
Martinez Corp. adjusts the carrying amount of its investments directly when recognizing an impairment loss, and each type of investment income is accounted for and reported separately.
SHOW LIST OF ACCOUNTS
Date
Account Titles and Explanation
Debit
Credit
Dec. 31, 2017
SHOW LIST OF ACCOUNTS
Date
Account Titles and Explanation
Debit
Credit
Dec. 31, 2017
SHOW LIST OF ACCOUNTS
Date
Account Titles and Explanation
Debit
Credit
Dec. 31, 2017
Martinez Corp., a December 31 year-end company that applies IFRS, acquired an investment of 1,100 shares of Credence Corp. in mid-2013 for $33,450. Between significant volatility in the markets and in the business prospects of Credence Corp., the accounting for this investment presented a challenge to Martinez. Toward the end of 2017, Credence discontinued the small annual dividend of $0.50 per share that it had been paying and announced that a major patent responsible for 50% of its income had lost most of its value due to a technological improvement by a competitor.
Situation 1: Credence Corp. is a publicly traded company on the Toronto Stock Exchange, and Martinez has opted to account for its investment at FV-NI. By the end of 2016, the price of Credence shares had fallen to $26.50 per share from $29 the previous year, and by the end of 2017 they were trading at $11.10.
Situation 2: Credence Corp. is a private enterprise owned by a group of 20 investors and is a supplier of materials to Martinez. Martinez purchased the shares to cement the relationship between the two companies and has opted to account for its investment at FV-OCI. In late 2016, Martinez was beginning to worry about its investment and determined that its value had probably fallen marginally to an estimated fair value of approximately $29,000 from $30,000 the previous year. In 2017, Martinez was more concerned and, at year end, carried out a thorough analysis of the present value of the likely cash flows to be derived from this investment and estimated an amount of $13,900.
Martinez Corp. adjusts the carrying amount of its investments directly when recognizing an impairment loss, and each type of investment income is accounted for and reported separately.
Explanation / Answer
In case of bonds purchased at a premium, the investor pays more than the face value up front. But , the bond’s maturity value is unchanged.
At the time of purchase, below entry will be recorded in the books of investor
Investment in Bonds Account........................Dr. 238,830.89
To Cash ........................................................Cr. 238,830.89
(Being entry to record purchase of bonds12%, FV 222,000)
The premium on bond will be amortised at each coupon payment date.
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