Quiz 15: Investments and Fairva Ueaccounting Compete Financialstatements for Momin Joe
It is given that- On July16, 1996 Wyatt Corp. purchased 40 acres of land for $ 350,000 and on December 18, 2014, Texopete Inc. purchased 40 acres of land for $ 2,000,000 located next to the Wyatt Crop. land. 1) According to the generally accepted accounting principles, fixed assets should be valued at cost of acquisition and if there is any permanent increase in the value of the asset then with a proper valuation and evidence then the net realizable value of the asset can be considered according to realization concept. Therefore, according to cost concept Wyatt Corp has to disclose the value of land at its cost on the balance sheet on December 31, 2014 at $ 350,000 and Texopete Inc. has to disclose the value of land at $ 2,000,000. 2) The two companies are comparable if the Wyatt Corp. values its fixed assets at their fair value or realizable value. That means on the balance sheet on December 31, 2014 the value of land to be disclosed as $ 2,000,000. If realization concept or fair value concept are followed then the financial statements of the companies are comparable.
A business may invest in another company's stock to earn interest revenue, receive dividends, realize gains from increase sin the market price of the securities, to develop a supplier relationship, or for strategic reasons.
Journal Entries: a. S Company has purchased $75,000 bonds on April 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. S Company has held the bonds for entire six months and the semiannual interest received will show a credit to the interest account against cash account. The interest of holding the bond for six months at 6% rate is, The entry is as follows. c. On October 1, 2014 S Company sells $25,000 bonds at 98% of face value or at 2% discount rate. The sales proceed from this transaction is, = 98% of $25,000 = $24,500 The value of investment sold is $25,000 against cash received $24,500. The balance is the loss on sale of investment. d. Interest on bond of C Co. is paid semiannually and is due on April 1 and October 1 every year. On December 31, 2014, three months of interest is to be accrued in the books worth $750. This entry debits the interest receivable account against interest account. Once the interest is received on April 1, 2015, cash is to be debited against both interest and interest receivable account. This way, interest receivable account will be zeroed on receipt of interest.
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