More Related Content
What's hot
What's hot (20)
Similar to Acc 423 week 3 ppt assignment team d
Similar to Acc 423 week 3 ppt assignment team d (14)
Acc 423 week 3 ppt assignment team d
- 1. Debt Securities & Presentment of Problem P17-1 ACC 423/Intermediate Accounting III Week 3 Team D Presentation – Chapter 17: P17-1 By: Michele Ratliff, Monique Jones, Trashala Davis, and Mirta Padilla
- 2. Debt Securities • Represent a creditor relationship with another entity • Include the following: • U.S. government securities • Municipal securities • Corporate bonds • Convertible debt • Commercial paper
- 3. Debt Securities • Held-to-Maturity • Debt securities that the company has the positive intent and ability to hold to maturity. • Trading • Debt securities bought and held primarily for sale in the near term to generate income on short-term price differences. • Available-for-Sale • Debt securities not classified as held-to-maturity or trading securities.
- 4. Accounting for Debt Securities
- 5. Problem P17-1 (Debt Securities) Amortization schedule for Kathy Baker Company Date Cash Interest Bond Premium Carrying Amount Received Revenue Amortization of Bonds 12/31/2004 $ 108,660 12/31/2005 $ 7,000 $ 5,433 $ 1,567 $ 107,093 12/31/2006 $ 7,000 $ 5,354 $ 1,646 $ 105,447 12/31/2007 $ 7,000 $ 5,272 $ 1,728 $ 103,719 12/31/2008 $ 7,000 $ 5,186 $ 1,814 $ 101,905 12/31/2009 $ 7,000 $ 5,095 $ 1,905 $ 100,000 Comparison of the amortized cost and fair value of the bonds at year-end 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 Amortized Cost $ 107,093 $ 105,447 $ 103,719 $ 101,905 $ 100,000 Fair Value $ 106,500 $ 107,500 $ 105,650 $ 103,000 $ 100,000 Unrealized Gain (Loss) $ 593 $ (2,053) $ (1,931) Fair Value Adjustment * $ 593 $ (2,646) $ 122
- 6. P17-1 continued … • Journal entries to record the purchase of bonds… Journal entry to record bonds at held-to-maturity December 31, 2004 Held-to-Maturity Securities $ 108,660 Cash $ 108,660 Journal entry to record bonds at available-for-sale December 31, 2004 Held-to-Maturity Securities $ 108,660 Cash $ 108,660
- 7. Solution of P17-1 • Journal entries related to held-to-maturity and available-for-sale bonds in 2005… Journal entry to record bonds at held-to-maturity December 31, 2005 Cash $ 7,000 Held-to-Maturity Securities $ 1,567 Interest Revenue $ 5,433 Journal entry to record bonds at available-for-sale December 31, 2005 Cash $ 7,000 Available-for-Sale Securities $ 1,567 Interest Revenue $ 5,433 Unrealized Holding Gain or Loss - Equity ($107,093 - $106,500) $ 593 Securities Fair Value Adjustment (Available-for-Sale) $ 593
- 8. Solution of P17-1 continued … • Journal entries related to held-to-maturity and available-for-sale bonds in 2007… Journal entry to record bonds at held-to-maturity December 31, 2007 Cash $ 7,000 Held-to-Maturity Securities $ 1,728 Interest Revenue $ 5,272 Journal entry to record bonds at available-for-sale December 31, 2007 Cash $ 7,000 Available-for-Sale Securities $ 1,728 Interest Revenue $ 5,272 Unrealized Holding Gain or Loss - Equity * $ 122 Securities Fair Value Adjustment (Available-for-Sale) $ 122 ($2053 carryforward from previous year less $1,931 that is required now)
- 9. References: Kieso,D.E., Weygandt, J.J., & Warfield, T.D. (2007). Intermediate Accounging, (12th ed). Hoboken, N: John Wiley & Sons.
Editor's Notes
- The objective of the presentation is to provide a background on debt securities and explain the process of preparing the necessary journal entries based on an amortized schedule related to Kathy Baker Company’s company.
- Companies can invest in two types of investments: debt securities and equity securities. Debt securities represent a creditor relationship with another entity. Equity securities represent ownership interests such as common, preferred, or other capital stock. This presentation will focus on debt securities only and will provide an example of them. Companies have different motivations for investing in securities issued by other companies (debt securities). One motivation is to earn a high rate of return - for example, a company can receive interest revenue from a debt investment.
- Companies group investments in debt securities into three separate categories for accounting and reporting purposes. These three debt securities include held-to-maturities, trading, and available-for-sale. Depending on the objective for the organization, the best deb security will depend on whether the intent is to hold to maturity, to sale the security near the term in order to generate income to recover any short-term price differences, or other reasons that fall outside these two reasons and can’t be classified as either a held-to-maturity or trading security.
- Following are the categories of debt securities along with the accounting and reporting treatments required for each.Amortized cost is the acquisition cost adjusted for the amortization of discount or premium, if appropriate. Fair value is the amount at which a company can exchange a financial instrument in a current transaction between willing parties, other than in a forced or liquidation sale.
- The above figures presented on Kathy Baker Company and are based on a 5-year, $100,000 bond with a 7% and a 5% yield, purchased on December 31, 2004, for $108,660. The objective will be to prepare the necessary journal entries to record the purchase of the bonds at held-to-maturities as well as available-for-sale securities. Additionally, under each debt security the corresponding journals will be presented for the years 2005 and 2007.
- Companies report debt securities at fair value not only because the information is relevant but also because it is reliable. Assuming the bonds are classified as held-to-maturity securities, the journal entry related to the held-to-maturity bonds for 2005, assuming they are classified as available for-sale, the journal entry related to the available-for-sale bonds for 2005.
- Debt securities that the company has the positive intent and ability to hold to maturity. Debt securities not classified as held-to-maturity or trading securities. The journal entry related to the held-to-maturity bonds for 2007, the journal entry to record the purchase of these bonds, and the journal entry related to the available-for-sale bonds for 2007.