Finance Questions

Questions

1. Distinguish between debt security and equity security
2. Identify and explain the three types of classifications for investments in debt securities.
3. When should debt security be classified as held-to-maturity?
4. Explain how trading debt securities are accounted for and reported.
5. At what amount should trading, available-for-sale, and held-to-maturity debt securities be reported on the balance sheet?
6. On July 1, 2017, Wheeler Company purchased $4,000,000 of Duggan Company’s 8% bonds, due on July 1, 2024. The bonds, which pay interest semiannually on January 1 and July 1, were purchased for $3,500,000 to yield 10%. Determine the amount of interest revenue Wheeler should report on its income statement for the year ended December 31, 2017.
7. What constitutes “significant influence” when an investor’s financial interest is below the 50% level?
8. What is the fair value option?

BE

17.5 Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock for $13,200 (Fairbanks does not have significant influence). During the year, Sherman paid a cash dividend of $3.25 per share. At year-end, Sherman stock was selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.

Exercise

E17-1

(L01,2) (Investment Classifications) For the following investments, identify whether they are: 1. Trading debt securities. 2. Available-for-sale debt securities. 3. Held-to-maturity debt securities. 4. None of the above. Each case is independent of the other. (a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected next month, it will be sold. (b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30% of its outstanding stock. (c) Bonds were purchased in December of this year. The bonds are expected to be sold in January of next year. (d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money has been tight recently and they may need to be sold. (e) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time. (f) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project planned 10 years from now.

E17-5

(L01) EXCEL (Effective-Interest versus Straight-Line Bond Amortization) On January 1, 2017, Phantom Company acquires $200,000 of Spiderman Products, Inc., 9% bonds at a price of $185,589. Interest is received on January 1 of each year, and the bonds mature on January 1, 2020. The investment will provide Phantom Company a 12% yield. The bonds are classified as held-to-maturity. Instructions

(a) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the straight-line method.

(b) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the effective-interest method

2018. c) Prepare the journal entry for the interest revenue and discount amortization under the straight-line method at December 31, 2018.

(d) Prepare the journal entry for the interest revenue and discount amortization under the effective-interest method at December 31, 2018

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