Bruce Company purchased $2,000,000 of Clarence, Incorporated, 4.0% bonds at par on July 1, 2023, with interest paidsemi-annually. Bruce determined that it should account for the bonds as an available-for-sale investment. At December 31,2023, the Clarence bonds had a fair value of $2,300,000. Bruce sold the Clarence bonds on July 1, 2024 for $1,950,000.Face amount of bondStated (and market) rateDecember 31, 2023 fair value of bondsSelling price of bonds, July 1, 2024$2,000,0004.0%$2,300,000$1,950,000Complete the following tables to show the effect of the Clarence bonds on Bruce's net income, other comprehensive income,and comprehensive income for 2023, 2024, and cumulatively over the two-year period. FORMULAS FOR LOSSES MUST RETURNNEGATIVE VALUES. Interest revenueGain (loss) on investment (Net income)Gain (loss) on investment (Unrealized)Reclassification adjustment (OCI)Net incomeOther Comprehensive incomeComprehensive income2023$40,0000300,000300,0002023$40,000300,000$340,0002024$40,000(50,000)300,000(300,000)2024($10,000)(300,000)($310,000)Total$80,000(50,000)600,0000Total$30,0000$30,000

The bond face value is $2,000,000.Rate stated (and market): 4.0%The fair value of bonds as of…

Answered: Interest revenue Gain (loss) on…

Financial Accounting

14th Edition

ISBN:9781305088436

Author:Carl Warren, Jim Reeve, Jonathan Duchac

Publisher:Carl Warren, Jim Reeve, Jonathan Duchac

Chapter15: Investments And Fair Value Accounting

Section: Chapter Questions

Problem 1E: Parilo Company acquired 170,000 of Makofske Co., 5% bonds on May 1, 2016, at their face amount....

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On January 1, 2019, Brewster Company issued 2,000 of its 5-year, 1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Brewster uses the effective interest method of amortization. On December 31, 2023, Brewster extinguished the 2,000 bonds early through acquisition in the open market for 1,980,000. On July 1, 2022, Brewster issued 5,000 of its 6-year, 1,000 face value, 10% convertible bonds dated July 1 at an effective annual interest rate (yield) of 12%. The bonds are convertible at the option of the investor into Brewsters common stock at a ratio of 10 shares of common stock for each bond. Brewster uses the effective interest method of amortization. On July 1, 2023, an investor in Brewsters convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewsters common stock, which had a market value of 105 per share at the date of the conversion. Required: 1. Using the information about Brewster, answer the following questions: a. Were the 11% bonds issued at par, at a discount, or at a premium? Why? b. Is the amount of interest expense for the 11% bonds using the effective interest method of amortization higher in the first or second year of the life of the bond issue? Why? 2. Using the information about Brewster, explain the following: a. How is a gain or loss on early extinguishment of debt determined? Does the early extinguishment of the 11% bonds result in a gain or loss? Why? b. How does Brewster report the early extinguishment of the 11% bonds on the 2023 income statement? 3. Based on the information provided about Brewster, answer the following questions: a. Does recording the conversion of the 10% convertible bonds into common stock under the book value method affect net income? What is the rationale for the book value method? b. Does recording the conversion of the 10% convertible bonds into common stock under the market value method affect net income? What is the rationale for the market value method?
Parilo Company acquired 170,000 of Makofske Co., 5% bonds on May 1, 2016, at their face amount. Interest is paid semiannually on May 1 and November 1. On November 1, 2016, Parilo Company sold 50,000 of the bonds for 96. Journalize entries to record the following: a. The initial acquisition of the bonds on May 1. b. The semiannual interest received on November 1. c. The sale of the bonds on November 1. d. The accrual of 1,000 interest on December 31, 2016.
Refer to the information in RE13-5. Assume that on June 30, Aggie received interest on the Smith Corporation bonds. Prepare the June 30 journal entries to record the receipt of the interest. On April 30, 2019, Aggie Corporation purchased Smith Corporation 10%, 5-years bonds with a face value of 12,000 at par plus four months of accrued interest. Prepare the April 30 journal entry to record the purchase of these available-for-sale securities.

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