Question

6. Patton Company purchased S600,000 of 10% bonds of Scott Co. on Jan urchased S600,000 of 10% bonds of Scott Co. on January 1, 2018, paying S564,150. The bonds mature January 1, 2028: interest is payable each July 1 an discount of $35.850 provides an effective yield of 11%. Patton Company uses th method and plans to hold these bonds to maturity. effective yield of 11%. Patton Company uses the effective interest On July 1, 2018, Patton Company should increase its Debt Investment account for ent account for the Scott Co. bonds by Interest Interest Discount Carrying a. $3,588. (Cash) (revenue) amortization amount b. S2,056. Jan 1 $564,150 c. S1,794 Jul 1 $30,000 $31,028 $1,028 565.178 d. $1,028. Dec, 31 30.000 31.085 1.084 7. Patton Company purchased $600,000 of 10% bonds of Scott Co. on January 1, 2018, paying S564,150. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $35.850 provides an effective vield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2018, Patton Company should report interest revenue from the Scott Co. bonds of: a. S63,588. b. $62,113 c. S62,052 d. $60,000. 8. Instrument Corp. has the following investments which were held throughout 2017-2018: Amortized Cost Fair Value on 12/31/2017 Fair Value on 12/31/2018 (bonds were acquired at face value) Trading $450,000 $600,000 S$70,000 Available-for-sale 450,000 480,000 540.000 What amount of gain or loss would Instrument Corp. report in its income statement for the year ended December 31, 2018 related to its investments? a. $30,000 gain. b. $30,000 loss. c. $210,000 gain. d. $120,000 gain. 9. Instrument Corp, has the following investments which were held throughout 2017-2018: Amortized Cost Fair Value on 12/31/2017 Fair Value on 12/31/2018 (bonds were acquired at face value) Trading $450,000 S600,000 $570,000 450,000 480,000 Available-for-sale 540,000 What amount would be reported as accumulated other comprehensive income related to investments in Instrument Corp.'s balance sheet at December 31, 2017? a. $60,000 gain. b. $90,000 gain. c. $30,000 gain. d. $180,000 gain.

Answer 1

6) Answer : a. $1028
This is because the discount on the Bond receivable is reversed, which
increase the Debt investment account.
Eg.	Debt Investment in Bonds	600000
	Less: Discount on Bond Receivable (35850-1028)	-34822
	Net Investment in Debt	565178	(increased by $1028)
7) Answer : b.$62113
Because interest expense includes the cash payment + reversal of Discount on
Bonds Receivable. So Cash received during 2018 is $60000 + Discount reversed (1028+1084), so
Interest expense is the total of $62113.
8) Answer : b. $30000 loss
this is because the gain and loss on fair value effect on Trading securities are
included in earnings. Whereas Fair value effect of Available for sale securities
are included in Stockholders' Equity separately in Comprehensive income
in balance Sheet.
9) Answer : a. $60000 gain
Reason :
The Fair value effect of Available for sale securities are included
in Stockholders' Equity separately in Comprehensive income
in balance Sheet. It is not included in year's earnings.