Journal Entry
By December 31, 2017, Pina Colada Corp. had performed a significant amount of environmental consulting services for Blossom Company. Blossom Company was short of cash, and Pina Colada Corp. agreed to accept a $187,500, non–interest-bearing note due December 31, 2019, as payment in full. Blossom Company is a bit of a credit risk and typically borrows funds at a rate of 15%. Pina Colada Corp. is much more creditworthy and has various lines of credit at 8%. Pina Colada Corp. reports under IFRS. The tables in this problem are to be used as a reference for this problem.
A) Prepare the journal entry to record the transaction on December 31, 2017, for Pina Colada Corp.
Account Titles and Explanation |
Debit |
Credit |
B) Assuming Pina Colada Corp.’s fiscal year end is December 31, prepare the journal entry required at December 31, 2018
Account Titles and Explanation |
Debit |
Credit |
C)Assuming Pina Colada Corp.’s fiscal year end is December 31, prepare the journal entry required at December 31, 2019.
Account Titles and Explanation |
Debit |
Credit |
Record Interest
Account Titles and Explanation |
Debit |
Credit |
To record Notes
D)
What are the amount and classification of the note on Pina
Colada Corp.’s statement of financial position as at December 31,
2018? (Round answer to 0 decimal places, e.g.
58,971.)
The balance of the note at December 31, 2018 $ The note would be classified as a / an _____________ (current asset, non-current asset, current liability, non-current liability, equity on the statement of financial position. |
E) Assume instead that Pina Colada Corp. reports under ASPE and uses the straight-line method to amortize the discount on the note. What would the interest income be relating to the note for 2018 and 2019? (Round answer to 0 decimal places, e.g. 58,971.)
Interest income for 2018 $__________ |
Interest Income for 2019 $ ____________
The key issue here is the discounting rate that should be used to arrive at the present value of the bonds issued by Blossom Company.
Fair value generally means the price that a willing market participant would be ready to pay for acquiring the asset or discharge of liability.
In the given case, as the bonds are issued by Blossom company, in case Pina Colada goes to the market to sell the interest free bonds, the market participant would use the risk profile of the issuer, i.e. Blossom Company to measure the bonds. Therefore, the interest rate applicable to Blossom Company would be used to discount the bonds to present value.
Journal entries
For section A
(assuming revenue is recorded at the time of providing the services and a receivable of USD 187,500 is outstanding in the books of accounts)
Journal on 31 December 2017
Particulars |
Dr/Cr |
Amount |
Computation |
Notes |
Dr |
141,776 |
(187500/1.15^3) |
Revenue |
Dr |
45,723 |
187500-amount of notes computed above |
Trade receivables |
Cr |
-187,500 |
Total value of trade receivable surrendered |
Considering that this is a change in payment terms of the contract, any adjustment arising in the value of the consideration would be made against revenue. The notes are recorded at fair value, the total amount of receivables existing in the books of accounts will be zeroed. Net adjustment of this vaue will be made in revenue as an adjustment to the contract price. Net revenue recorded will 187,500, assumed to be already recorded at the time of providing the services less 45,723, adjustment made on year end.
For section B (entry on 31 December 2018)
Particulars |
Dr/Cr |
Amount |
Computation |
Notes |
Dr |
21,226 |
(141,776*15%) |
Finance Income |
Cr |
-21,226 |
|
Entry passed for unwinding of interest on notes. Interest recognised at 15%. Closing balance of Notes USD (141,776+21,226)=163,043
For section C (entry as on 31 December 2019)
Particulars |
Dr/Cr |
Amount |
Computation |
Notes |
Dr |
24,457 |
(163,043*15%) |
Finance Income |
Cr |
-24,457 |
|
Cash/Bank |
Dr |
187,500 |
|
Notes |
Cr |
187,500 |
Entry passed for unwinding of interest on notes. Interest recognised at 15% of previous closing balance of notes. Closing balance of Notes USD (163,043+24,457)=187,500
Second entry is passed to record redemption of notes.
Section D
Balance of notes as on 31 December 2018 is USD 163,043.
This will be classified as a current asset in the statement of financial position as this is due for redemption within 12 months of the date of statement of financial position.
Section E
In case the entity uses ASPE, the interest would be straightlined over 2 years. The total interest element is 45,723. The amount therefore recognised as interest income in 2018 and 2019 would be USD 22,861 each (45,723/2)
Journal Entry By December 31, 2017, Pina Colada Corp. had performed a significant amount of environmental...
Pina Colada Corp.’s balance sheet at December 31, 2018, is
presented below.
Pina Colada Corp.
Balance Sheet
December 31, 2018
Cash
$14,300
Accounts payable
$8,900
Accounts receivable
20,600
Common stock
19,500
Allowance for doubtful accounts
(700
)
Retained earnings
14,900
Inventory
9,100
$43,300
$43,300
During January 2019, the following transactions occurred. Pina
Colada uses the perpetual inventory method.
Jan. 1
Pina Colada accepted a 4-month, 8% note from Merando Company in
payment of Merando’s $5,100 account.
3
Pina Colada wrote...
Comprehensive Problem 8 (Part Level
Submission)
Pina Colada Corp.’s balance sheet at December 31, 2018, is
presented below.
Pina Colada Corp.
Balance Sheet
December 31, 2018
Cash
$14,300
Accounts payable
$8,900
Accounts receivable
20,600
Common stock
19,500
Allowance for doubtful accounts
(700
)
Retained earnings
14,900
Inventory
9,100
$43,300
$43,300
During January 2019, the following transactions occurred. Pina
Colada uses the perpetual inventory method.
Jan. 1
Pina Colada accepted a 4-month, 8% note from Merando Company in
payment of Merando’s...
On January 1, 2020, Pina Colada Corp. acquires $310,000 of
Spider Products Inc. 9% bonds at a price of $294,849. The interest
is payable each December 31, and the bonds mature on December 31,
2022. The investment will provide Pina Colada Corp. with a 11%
yield. Pina Colada Corp. applies IFRS and accounts for this
investment using the amortized cost model.
Prepare a three-year bond amortization schedule.
(Round answers to 0 decimal places, e.g.
5,275.)
Schedule of Interest Income
and...
Pina Colada Corp. has the following balances in selected accounts on December 31, 2020. Service Revenue Insurance Expense Supplies Expense $43.200 5,580 2.800 All the accounts have normal balances. Pina Colada Corp. debits prepayments to expense accounts when paid, and credits unearned revenues to revenue accounts when received. The following information below has been gathered at December 31, 2020. 1. 2 Pina Colada Corp. paid $5.580 for 12 months of insurance coverage on June 1, 2020. On December 1, 2020,...
Pina Colada Corporation purchased 1,050 common shares of Nolan Inc. common stock for $14,600 (Pina Colada does not have significant influence). During the year, Nolan paid a cash dividend of $3.90 per share. At year end, Nolan stock was selling for $35.20 per share. Prepare Pina Colada’s journal entry to record the purchase of the investment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for...
CALCULATOR FULL SCREEN Problem 10-2A The following are selected transactions of Pina Colada Corp.. Pina Colada prepares financial statements quarterly Jan. 2 Purchased merchandise on account from Nunez Company, $34,800, terms 3/10, n/30. (Pina Colada uses the perpetual inventory system.) Feb. 1 Issued a 9%, 2-month, $34,800 note to Nunez in payment of account. Mar. 31 Accrued interest for 2 months on Nunez note. Apr. 1 Paid face value and interest on Nunez note. July 1 Purchased equipment from Marson...
1. Pina Colada Corp. began operations on January 1, 2020. Its fiscal year end is December 31. Pina has decided that prepaid costs are debited to an asset account when paid, and all revenues are credited to revenue when the cash is received. During 2020, the following transactions occurred. On January 1, 2020, Pina bought office supplies for $3,940 cash. A physical count at December 31, 2020 revealed $1,820 of supplies still on hand 2. Pina bought a $5,760, one-year...
1. Pina Colada Corp. began operations on January 1, 2020. Its fiscal year end is December 31. Pina has decided that prepaid costs are debited to an asset account when paid, and all revenues are credited to revenue when the cash is received. During 2020, the following transactions occurred. On January 1, 2020, Pina bought office supplies for $3,940 cash. A physical count at December 31, 2020 revealed $1,820 of supplies still on hand 2. Pina bought a $5,760, one-year...
Question 31 The trial belance of Pina Colada a: December 31 shows Inventory $21,100, Seles Revenue $161,500, Seles Returns and Allowances $4,800, Sales Discounts $2,900, Cost of Goods Sold $93,500, Interest Revenue $5,200, Freight-Out $2,100, Utilities Expense 7.500, and Salaries and Wages Expense $18,800. Propare the closing antrias for Pina Colada. (Crodit account titles are automatically indented when amount is onterod. Do not indent manually. If no entry is required, select "No Entry for the account titles and onter 0...
Un January 1, 2020, Pina Colada Corp. had the following stockholders' equity accounts Common Stock ($24 par value, 59,000 shares issued and outstanding) $1,416,000 Paid-in Capital in Excess of Par-Common Stock 197,000 Retained Earnings 559,000 During the year, the following transactions occurred. Declared a $3 cash dividend per share to stockholders of record on February 15, payable March 1 Mar. " Paid the dividend declared in February Athird Apr. Announced a 2-for-1 stock split. Prior to the split, the market...