Problem 14–23 (continued)
Requirement 4
If the fair value on December 31 is $342,000, Appling needs to compare that
amount with the amortized initial measurement on that date. That amount was
increased when Appling recorded interest on December 31:
Interest expense (5% x [$331,364 + 284 + 284] x 3/6)8,298
*Interest payable is considered part of the book value of the bonds.
December 31 book value (amortized initial amount) $332,528
Appling would record the $14,702 loss as OCI in the 2018 statement of
comprehensive income:
Problem 14–23 (continued)
Appling’s 2018 statement of comprehensive income will include the interest
expense for all four quarters as well as the gains and losses (OCI) from adjusting to
fair value:
Interest expense, 1st quarter $ 8,284
Interest expense, 2nd quarter 8,284
We are ignoring income tax in this problem, but note that gains–OCI and
losses–OCI are reported in the statement of comprehensive income net of tax.
The same result can be reached by comparing fair values at the beginning and
end of the year and including semiannual interest amounts rather than
quarter-by-quarter:
January 1 book value $331,364
Problem 14–23 (concluded)
Appling would record the $9,471 loss as OCI in the 2018 statement of
comprehensive income:
Appling’s 2018 statement of comprehensive income will include the interest
expense for June 30 and December 31 as well as the loss–OCI from adjusting to
fair value:
Interest expense, June 30 $16,568
We are ignoring income tax in this problem, but note that gains–OCI and
losses–OCI are reported in the statement of comprehensive income net of tax.
Problem 14–24
Requirement 1
2018
July 1
Oct. 1
Bond investment (face amount)……………………………….. 30,000,000
Dec. 1
Cash (6% x $30,000,000)………………………………………….. 1,800,000
……………………………….Premium on bond investment*
* 10 years – (June–September) = 116 months
$1,160,000 ÷ 116 months = $10,000 / month
$10,000 x 2 months = $20,000
Dec. 31 Accrued interest
Bracecourt
* 20 years = 240 months
$300,000 ÷ 240 months = $1,250 / month
$1,250 x 6 months = $7,500
Framm
Interest receivable ($30,000,000 x 12% x 1/12)……………… 300,000
Problem 14–24 (continued)
2019
Jan. 1
June 1
Cash (12% x $30,000,000 x 6/12)………………………………… 1,800,000
………………………….Premium on bond investment ($10,000 x 5 months)
July 1
Cash (10% x $16,000,000 x 6/12)………………………………… 800,000
Sept. 1
Cash ([101% x $15,000,000] + $450,000)……………………… 15,600,000
Loss on sale of investment ** ………………………………. 375,000
………………………………..Bond investment (face amount)
Problem 14–24 (continued)
Dec. 1
Cash (12% x $15,000,000 x 6/12)…………………………………. 900,000
……………………………………….Premium on investment*
* ($10,000 x 6 months x 15/30)
Dec. 31 Accrued interest
Bracecourt
Framm
Interest receivable ($15,000,000 x 12% x 1/12)……………… 150,000
2020
Jan. 1
Problem 14–24 (continued)
Feb. 28
Interest receivable (12% x $15,000,000 x 2/12)……………… 300,000
………………………………….Premium on investment ($10,000 x 2 months x 15/30)
Cash ([102% x $15,000,000] + $150,000 + 300,000)…………. 15,750,000
Loss on sale of investment ** ………………………………. 195,000
………………………………..Bond investment (face amount)
Dec. 31 Accrued interest
Problem 14–24 (concluded)
Requirement 2
2018
Interest revenue—Dec. 1
$ 580,000
2019
Interest revenue—June 1
$1,450,000
Interest revenue—July 1
2020
Loss on sale of investment