Question

a) RHS Financial Group. paid $500,000 for a 25% investment in the common shares of Silk Corporation. For the first year, Silk reported net income of $200,000 and at year-end declared and paid cash dividends of $100,000. On the balance sheet date, the fair value of RHS Financial Group's investment in Silk Corporation shares was $384,000. Requirements: a) Which method is appropriate for RHS Financial Group to use in accounting for its investment in Skill Corporation? Why? b) Show everything that RHS Financial Group would report for the investment and any investment revenue in its year-end financial statements. b) Suppose BMO issued a six-year $10,000 bond with stated interest rate of 6.25% when the market interest rate was 6.25%. Assume that the accounting year of BMO ends on October 31. Journalize the following transactions, including an explanation for each entry. a) Issuance of the bond, payable on May 1, 2014 b) Accrual of interest expense on October 31, 2014 (rounded to the nearest dollar) c) Payment of cash interest on November 1, 2014 d) Payment of the bonds at maturity (give the date) Answer: lish (Canada)

Answer 1

Qa)

a) RHS Financial Group would have to follow the Equity Method

towards its investment in Silk Corporation because they are

have a significant investment in the Silk which is more than 20%.

Investment from 21% to 50% should be treated as Equity investment.

b) RHS Financial Group should book the investment revenue towards

the 25% investment in common shares of Silk in the "Equity Investment

in Silk" account and book 25% of the dividend realised by the Silk as the

dividend income and withdrawal from the "Equity Investment in Silk"

account. As the investment is a Equity one , so no fair value adjustment

is required. The Investment accounts can be expressed as:

Equity Investment in Silk Account:
Debit	Amount $	Credit	Amount $
Cash	500000	Cash dividend (25%)	25000
Net Income of Silk (25%)	50000	CB	525000
Qb)
Date	Acc Titles	Debit $	Credit $
1-May-14	Cash	10000
	Bond Payable		10000
	(issuance of bonds)
(As stated interest rate and market interest rate are same, so offer price should be the par value)
31-Oct-14	Interest expense	312.5
	Interest payable		312.5
	(interest accrued for 6 months booked)
1-Nov-14	Interest payable	312.5
	Cash		312.5
	(interst paid )
30-Apr-20	Bond Payable	10000
	Cash		10000
	(bond repaid on maturity)