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Stocks and Bond Questions

Problem 1
On January 1, 2002, the ABC Corpoartion purchased a six-year, 12% bond having a maturity
value of $300,000. The bond was purchased at a market price of $288,000 and provides an
effective interest rate of 13%. The bonds are dated January 1, 2002 and mature on
January 1, 2008. Interest is payable annually on December 31. The bonds are classified as
held-to maturity.

Required:
a. Prepare the amortization schedule for the full six years (manually adjust the amortization for the
sixth year due to rounding differences). Use the table in the text as a guide.

b. Prepare the journal entry to record the purchase of the bond.

c. Prepare the journal entries to record the amortization of the bond and the receipt of interest for the
years 2002 and 2003.

Use this page for your amortization schedule and page 2 for your journal entries.

AMORTIZATION SCHEDULE

Problem 2
Assume the same facts as in Problem 1 except that the bond is classified as available for sale. The
fair value of the bonds as of December 31 of the first three years are as follows:

2002 $295,000
2003 $290,000
2004 $285,000

Required:
a. Prepare the journal entry to record the purchase of the bond.
b. Prepare the journal entries for interest revenue and the adjustment for fair value for
the first three years.

USE PAGE 4 FOR YOUR JOURNAL ENTRIES
USE THIS SPACE FOR T-ACCOUNTS

Problem 3
XYZ Corporation has the following equity available-for-sale securities as of December 31, 2001.

Security Cost Fair Value
Sara Lee (10,000 shares) $220,000 $330,000
Skyline (5,000 shares) 10,000 75,000

On March 3, 2002, XYZ sells Sara Lee for $325,000 and purchases 2,000 shares of 3M stock for $85
per share plus $5,000 of brokerage fees. On December 31, 2002, the fair value of Skyline was $60,000
and the fair value of 3M was $180,000.

Required:
a. Prepare the entry for December 31, 2001 fair value adjustment.
b. Prepare the entry to record the sale of Sara Lee stock and purchase of 3M.
c. Prepare the entry for December 31, 2002 fair value adjustment.

USE PAGE 6 FOR YOUR JOURNAL ENTRIES

Problem 4
Large Company purchases 40% of Small Company on January 1, 2002 for $500,000. This acquisition
gives Large Company significant influence over Small Company. During 2002, Small Company reports net
income of $90,000 and paid cash dividends of $30,000 on September 1, 2002.

Required:
a. Prepare journal entry to record the purchase of Small Company stock.
b. Prepare the journal entry to record the receipt of the cash dividend.
c. Prepare the journal entry to record Large Company's share of Small Company's net income.
d. Prepare a T-Account showing the new balance in the Investment account as of December 31, 2002.

USE PAGE 8 FOR YOUR JOURNAL ENTRIES

Attachments

Solution Summary

The solution explains how to prepare an amortization schedule and journal entries for bond issuance and entries for available for sale securities and dividends

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