Ch.

17 Exercises and Answers

E17-3 (Debt Investments, Amortized Cost):
On January 1, 2022, Roosevelt Company purchased 12% bonds having a
maturity value of $500,000 for $537,907.40. The bonds provide the
bondholders with a 10% yield. They are dated January 1, 2022, and mature
January 1, 2027, with interest receivable December 31 of each year.
Roosevelt’s business model is to hold these bonds to collect contractual cash
flows.
Instructions:
(a) Prepare the journal entry at the date of the bond purchase.
(b) (b) Prepare a bond amortization schedule.
(c) (c) Prepare the journal entry to record the interest received and the
amortization for 2022.
(d) (d) Prepare the journal entry to record the interest received and the
amortization for 2023.
Answer:
(a) January 1, 2022

Debt Investments............................................... 537,907.40

Cash............................................................. 537,907.40

(b) Schedule of Interest Revenue and Bond Premium Amortization

12% Bonds Sold to Yield 10%
Cash Interest Premium
Received Revenue Amortized Carrying Amount
Date (1) @ 10% (2) (1-2) of Bonds
1/1/22 — — — $537,907.40
12/31/22 $60,000 $53,790.74 $6,209.26 531,698.14
12/31/23 60,000 53,169.81 6,830.19 524,867.95
12/31/24 60,000 52,486.80 7,513.20 517,354.75
12/31/25 60,000 51,735.48 8,264.52 509,090.23
12/31/26 60,000 50,909.77* *9,090.23 500,000.00
*Rounded by 75¢.
(c) December 31, 2022

Cash....................................................................... 60,000.00
Debt Investments.......................................... 6,209.26
Interest Revenue........................................... 53,790.74

(d) December 31, 2023

Cash....................................................................... 60,000.00
Debt Investments.......................................... 6,830.19
Interest Revenue........................................... 53,169.81
E17-4 (Debt Investments):
Assume the same information as in E17-3 except that Roosevelt has an active
trading strategy for these bonds. The fair value of the bonds at December 31
of each year-end is as follows.
2022 $534,200, 2023 $515,000, 2024 $513,000
2025 $517,000, 2026 $500,000
Instructions:
(a) Prepare the journal entry at the date of the bond purchase.
(b) (b) Prepare the journal entries to record the interest received and
recognition of fair value for 2022.
(c) (c) Prepare the journal entry to record the recognition of fair value for
2023.
(d) Discuss how the response to (c) will be different assuming Roosevelt
has a strategy of held-for-collection and selling.

Answer:
(a) January 1, 2022
Debt Investments.................................................. 537,907.40
Cash............................................................... 537,907.40
(b) December 31, 2022
Cash....................................................................... 60,000.00
Debt Investments ($60,000.00 − $53,790.74)....... 6,209.26
Interest Revenue ($537,907.40 × 0.10)........ 53,790.74

Fair Value Adjustment ($537,907.40 − $6,209.26)................... 2,501.86

Unrealized Holding Gain or Loss−
Income ($534,200.00 − $531,698.14)...... 2,501.86

(c) December 31, 2023

Unrealized Holding Gain or Loss−Income.. 12,369.81
Fair Value Adjustment............................ 12,369.81
 Unrealized
Amortized Holding
Cost Fair Value Gain (Loss)
Debt investments $524,867.95 $515,000.00 ($ (9,867.95)
Previous fair value
adjustment—Dr. 2,501.86
                 
Fair Value Adjustment—Cr. $(12,369.81)

(d) If classified as HFCS, all computations and measurements are

the same as if classified as trading. The only difference is that
Unrealized Holding Gain or Loss−Equity is used to record
unrealized gains and losses.
E17-5 (Debt Investments):
On January 1, 2022, Morgan Company acquires $300,000 of Nicklaus, Inc., 9%
bonds at a price of $278,384. The interest is payable each December 31, and
the bonds mature December 31, 2024. The investment will provide Morgan
Company with a 12% yield. The bonds are classified as held-for collection.
Instructions:
(a) Prepare a 3-year schedule of interest revenue and bond discount
amortization. (Round to nearest cent.)
(b) (b) Prepare the journal entry for the interest receipt of December 31,
2023, and the discount amortization.

Answer:
(a) Schedule of Interest Revenue and Bond Discount Amortization
9% Bond Purchased to Yield 12%
Cash Interest
Received Revenue Bond Discount
@9% @12% Amortization Carrying Amount
Date (1) (2) (2-1) of Bonds
1/1/22 — — — $278,384.00
12/31/22 $27,000 $33,406.08* $6,406.08 284,790.08
12/31/23 27,000 34,174.81 7,174.81 291,964.89
12/31/24 27,000 35,035.11** 8,035.11 300,000.00

**$278,384 × 0.12 = $33,406.08

**Rounded by $0.68.

(b) December 31, 2023

Cash....................................................................... 27,000.00
Debt Investments.................................................. 7,174.81
Interest Revenue........................................... 34,174.81
E17-7 (Fair Value Option):
Refer to the information in E17-3 and assume that Roosevelt elected the fair
value option for this held-for-collection investment.
Instructions:
(a) Prepare any entries necessary at December 31, 2022, assuming the fair
value of the bonds is $540,000.
(b) (b) Prepare any entries necessary at December 31, 2023, assuming the
fair value of the bonds is $525,000.

Answer:
(a) December 31, 2022

Debt Investments.................................................. 8,301.86

Unrealized Holding Gain or Loss−
   Income ($540,000 – $531,698.14).............. 8,301.86

(b) December 31, 2023

Unrealized Holding Gain or Loss−Income.... 8,169.81

Debt Investments
($533,169.81 – $525,000)..................... 8,169.81

Carrying Value at 12/31/22............................. $540,000.00

Amortization.................................................... (6,830.19)(See
Exercise 17.3)
Carrying Value at 12/31/23...................... $533,169.81