a. M Investment has purchased $150,000 bonds on September 1, 2014 at face value. Thus, there is a debit in the investment account against cash used to purchase it. The entry is as follows.
b. M Investments has held the bonds for four months as on December 31, 2014 and the interest is not payable until March 1. Thus, the interest is to be accrued for four months at the rate of 8% on December 31, 2014. An entry is made to Interest Receivable account against Interest account. Once, interest is paid out on March 1, cash is to be debited against both the accounts.
The value of accrued interest on December 31 (four months) is,
The entry is as follows.
c. On March 1, 2015 semiannual interest is received. This amounts to,
As explained in the section above, part of this interest has been accrued to Interest Receivable account on December 31, 2014 (for four months). Thus, the cash received as interest is debited against Interest Receivable account and Interest account.
d. Half of the bonds have been sold on March 1, 2015 at 102% of purchase price or at a gain of 2%. The sales receipt from this sales is,
= 102% of $75,000
The cash is to be debited against investments account. The value of investments sold is $75,000 only. The balance is to be credited as Gain on Sale of Investment account. The entry is as following.
Whenever an investor company purchases substantial amount of shares of the investee company, like anything between 20%-50%, the investor acquires significant control over decisions and operations of the investee. Such investment is assumed to be made for strategic reasons only and hence the equity method is applied.
This method requires the net income of the investee to be reflected in the investment account of the investor in proportion to the share of the investor. Also it requires payment of dividend to be reflected as a decrease in the investment corpus proportionately. Thus, such transactions by the investee are made to reflect in the investment account of the investor since it has a strategic interest in income and payments of investee.
(1) IAS stands for International Accounting Standards. These are the accounting standards set by the International Accounting Standards Committee. The GAAP stands for Generally Accepted Accounting Principles. IAS does not have any legal authority over GAAP. The IASC is merely a very influential group of people who love making accounting rules. Therefore, a lot of people listen to what the IASC have to say. When the IASC sets a new accounting standard, the countries tend to adopt it, or at least interpret it. These standards, as set by the particular country will in turn influence what becomes GAAP for that country.
(2) Fair value is an estimate, which is less reliable. There are certain assets, like shares, which are frequently traded in the market. Therefore the fair value of shares can be reliable. But the other assets don't have reliable fair values. The estimate may not be that accurate. Therefore Auditors generally hate fair value accounting, because of lack of reliability. The other major disadvantage in fair value accounting is that the fair values fluctuate significantly over a short period. Thus the results of the company changes (fluctuates) significantly.
(3) International accounting treatment for changes in the fair value for property, plant and equipment similar to investments as both are valued and reported in the Balance sheet at their fair values. However, the increase in property is credited to shareholder's equity, whereas the increase in investments is credited to operating income of that period.