Hi and welcome to demonstration video
for brief exercise 12-1, exercise
12-1 and problem 12-1 what I'll do is I have three different tabs down here 
this tab will be for brief exercise 12-1
this will be for exercise 12-1
and this tab will be for problem 12-1
I will post in the video as well in the
notes so you will get
a chance to print it out if you need to
to help you along with the
assigned homework or practice homework however you want to utilize it, it's really up to you.
okay you'll need to book and
the first one we'll be doing is the brief exercise 
12-1 and this is on page
703 and
I will start out by doing this first
problem and then I'll move to the next tab and so on.
Okay, so for brief exercise 
12-1, Lance Bros. 
enterprises acquired 720,000
of 3 percent bonds
dated July first on July 1st 2013
and a long term investment. Management
has the positive intent and the ability to hold the bonds until
maturity. The market interest rate yield was worth 4 percent
for bonds of similar risk in maturity. Lance Bros. paid 
$600,000 for the
investment in bonds and will receive
interest semi-annually on June
thirtieth
and December 31st. Prepare the journal entries
A, to record the Lance bros. investments in the bonds on July 1st
2013 and B, to record interest in
December 31st
2013 at the effective market rate.
Okay, so
requirement of A
We are going to journalize
the bond to record the bond or the
investment at July 31st, 2013.
July 1st excuse me.
So we have because Lance Bros.
enterprises acquired
the bond  we have to put it into our balance
sheet as
investment in bonds, that would be the account name
that would be my debit of $720,000.
This name here doesn't have to be investments in bonds it can be just investment or it could
be just bonds there is different names
but we're just using this name for now
there could be different names among
different companies.
And
we also payed, the company paid
cash in the amount 
of
600,000. So that difference
from that 720,000 to the 600,000
is a 120,000 which
will be our
discount on bond investment, which is the difference.
So that's how it will look like
our journal entry, we will have a
credit to cash
600,000 because they used cash to purchase these bonds, and they will then record 
in their balance sheet for investment in
bonds
700,000 and they will have a discount
on bond investment of a 120,000. And discount on bonds its a contrasted account
it's going to go ahead and decrease this
investment in bonds or net amount.
At the end of when the bonds mature
the amount of the discount netted with
the seven hundred twenty thousand
dollars
the discount
on the bonds investment well when
netted with
the bonds will equal that cash price.
Okay, and B
The requirement in B is to record the interest from December 31st 2013
at the effective rate or market rate.
So
at this time is when
Lance Bros. enterprises recieves
cash in for the interest, so we know we will
debit cash, we know we will
debit discount on bonds
in investment and we will record
interest revenue.
So first of all, with the cash amount...
So interest, I'm going to do interest first,
its 2 percent times
600,000 the
bond yield of four percent but because
interest
calculated twice a year, you are going to take four percent divided by 2 which is 
2%
so I interest is going to be twelve
thousand
and then our cash is gonna be
the seven hundred twenty thousand times
1.5 percent so that'll get us to
Did I put to much in there?
That looks better
I forgot to put the percentage in there that why. Okay so our difference which is
discount of bond investment is going to be 1,200 dollars
okay so before moving on
to exercise 12-1,
this is 1.5 percent times
720,000 remember the bonds yield
a three percent interest
and because once again interest is
calculated semi-annually
you are going to take that 3 percent divided by two because interest is
calculated twice
a year, we are going to get 1.5 percent and that's how we got that 
10,800 dollars so that's how we record
the interest
for the bonds at December 31st 2013
using the effective market rate.
So that's brief exercise 12-1. Alright so lets move on to 12-1
exercise 12-1 I'm going to do it on this new tab
so you just click on the bottom here and
let me just denote that this is exercise 12-1
and this will be on page 705
Alright, so first of all once again you will need your book. I will read through
the problem and then we will go through I will show you how to do
each requirement. Tanner UNF corporation acquired, as a long term investment 
240 million dollars of
six-percent bonds dated July 1st on July
1st 2013
company management has positive intent and the
 ability to hold the bonds until maturity. The marked interest rate yield was 8% for  
bonds of similar risk and maturity. Tanner UNF paid
two hundred million dollars for the bonds
the company will recieve
interest semi-annually on June thirtieth
in December 31st
as a result of changing market conditions the fair value of the bonds at
December 31st 2013 was $210 million.
Okay,
so for requirement one we are to prepare the journal entry for
for Tanner UNF
investment in the bonds on July 1st
2013. Okay so for requirement one
once again kinda like the same 
brief exercise here that we did here our journal entry is gonna look very similar
we're going to debit investment
in bonds, which is the face amount
in the amount of
240 million
these are going to be pretty big numbers so
I'm not sure what connect is
gonna have you do, it might have you put in the full amount
or it might have you put in
just 240 and
stating that it is in millions so I'm going to
do this for now I'm not sure how
connect is going to make you do it, but if you have confusion with it just let me know
and then our credit amount is going to be
discount on bond
investment and
the cash price that we payed for the bonds.
Alright, so we pay cash in the amount of
$200 million
so our difference which is the discount
will be then 40 million
so that's requirement one.
In requirement 2, prepare a journal entry to Tanner UNF to record
interest on December 31st 2013 and the
effective market
rate. So very similar
once again to brief exercise 12-1 what we did here.
So we know we are going to be debiting cash
and the bonds yielded
6 percent but once again, because we are calculating
interest semiannually six-percent
divided by two
is going to be three percent times the 240
million.
My debit also is going to be discount on bond investment.
And my
interest is going to be the credit because we are
recording interest revenue here.
The interest yielded 8% but we are 
calculating the interest semiannually so
it's gonna be four percent
times the 200 million so here's my
calculation
200 million times
4 percent
and $240 million
times the 3% and my difference then
is gonna be my discount in bond investment of
800,000
basically we got cash in of 7.2 million
for the interest
because we've bought it at a discount that
800,000 is going to discount and we will record for interest revenue
eight million dollars. Requirement
three at what amount will Tanner UNF
report its investment in the December 31st
2013 balance sheet and why?
Okay I'm gonna be typing what I'm writing down so you can see what
I'm saying
so that you can use it for later on
Alright so Tanner is going to 
going to report its investment in the December 31st 
2013 balance sheet
at its amortized cost
and this will be the book value
So this is how its going to look like in the balance sheet you are going to have investment in
bonds which is going to be listed in the balance sheet
man investment in bonds gonna be at
children forty million K
that's what they bought it for that's
the cost amount we are going to subtract
the discount on bond investment
which is going to be our forty million
minus
the 800,000
from up here
okay? So that is going to equal
subtract that and I'm going to
put it right here so if you do
the $40 million minus 800,000 we are going to subtract
39,000 excuse me $39 million
200,000 and our
amortized cost then is going to be the
240,000 million minus 39.2 million
equals 200 million eight hundred
thousand dollars
so this is something that's gonna
appear on be balance sheet of
Tanner UNF, so that's how going to look like
Let me just kinda highlight this and color code it so you can see...Oh
that's really bright I'm going to make it a lighter color 
lets make it this color here
okay there doesn't hurt eyes as much.
So that's how that's gonna look
like and their balance sheets
okay so just keep in mind that
if sale before maturity
isn't an alternative increases and
decreases
in the market value between the time the 
debt security is acquired in the day
it matures to prearrange maturity values are relatively
unimportance so for this reason
if an investor has the positive intent and
ability
to hold the securities to maturity
investments in debt securities
classified as held to maturity and reported as
amortized cost rather than fair value in the balance sheets
this is exactly what we did here. As reported at amortized cost because
the investor had the intent
of holding these bonds until it matures if
it doesn't have the intent
of holding the bonds until it matures then we will have to
update that value of these bonds to the fair market value
change every period
when we prepare financial statements but
that's kinda discussion for
later on for some of the other investments
and I'll show you that in the other problems
So hopefully now have a better
understanding of how this
the requirement 3 is asking for. So for requirement
four
Suppose Moody's bond rating agency downgraded the risk rating of the bonds
motivating Tanner UNF to sell the investments on January 2nd 2014 for
190 million. Prepare the journal entry to record the
sale. Okay, so in this case they are saying that
in a way TNF is gonna
sell the bonds before it matures. How is this recorded?
Well first of all think about this, for selling bonds we know we are going to get cash in
so we know we are going to have to debit cash, and we can debit cash and we can call this
proceeds from sale of bonds or
proceeds from sale, that is perfectly fine
we will also take the discount on the bonds
off the book
We will either have a loss or a gain, so a loss would be
debited and a gain would be credited so we will leave a space here
just in case it's a lost and I will
go ahead here and
we have to take the investment
in bonds, the face amount, off the books
because if we are selling something we got to take that off the books
no longer needed in our balance sheet, so we bought the bonds for 240 million
we know that so we are going to take that off the books here by crediting it
 we know that we are selling the bonds for 190 million.
So we are going to put that up here. And the discount on the bond
investments we're already calculated
here
that that's what is because we calculate
if lets say, this requirement was 
for a later date, later than January
this might change let's say we did in
February
it will change but because Jan you right
after December 31st
it will be the $39 million two hundred thousand. So
from all of these amounts here we can determine
if with sold the bonds for 
i guess if we had a gain or loss
then we can determined that from the three
different amounts, if you add these up
all your debits, if they do not equal your credits
this if you in EXCEL if you highlight over the numbers that you want to add up
down here in this area hopefully you
can see that, it gives you a sum of 229 million 200 thousand
Which is short of the 240,000
million
so we know that we have a loss, and like I said earlier
if you have a loss its a debit. So it will be loss
on sale of investment, and it
will be then, I'm going to do 
formula here, but you don't have to do a formula you can
do this on a calculator and put it in, and
should have done it this way, less
there we go. Okay so, our loss on the investment on the bonds is
10 million eight hundred thousand
dollars because we decided to sell it
on January second for 190 million
if let's say
we had sold it for more than 190 million
let's say we sold it for 
230,000, let's see how that looks like.
Okay, in that case we would have a gain.
Okay, see how that is bigger there but then
if we had a gain,
cause if you add these two together
it certainly is way bigger
then your, the investment that you initially
invested into the bonds.
So what you can do is add these
two together, and subtract this, and we would have a gain
and that would be gain
 on sale of investment, for that 29,200,000. That's only if we sold it for
230 million but that's not the case so I'm just going to undo everything
We sold it for 190 million
not that examples scenario I made.
So in this case we have lost in the sale of investment of
$10,800,000. Okay, so that's for that one.
Hopefully you get a better understanding of it. And once you go in and
do the problem
you will surely get a better
understanding what's really going on
but this is just one example for 12-1.
Okay, so this next one is
going to be problem 12-1. On page
715. And once again
this is going to be the same concept, it is going to be securities held
to maturity investments. I'm going
show you again.
The step similar to what we did in the previous exercise
12-1 for brief exercise, and then
exercise 12-1, and then in this one
it's just, basically we're doing
everything over
except, we are not doing,
all requirements except
number five
and this will be the same scenario when
you do your homework
number five will not be required. Okay
so
requirement one we are going to prepare;
and I apologize, I forgot to read the problem, so lets read the problem first
Fuzzy Monkey Technologies INC. 
purchase a long-term investment 80 million
dollars
of 8% bonds. Dated January 1st on January 1st 2013.
Management has the positive intent
and ability to hold the bonds until
maturity
for bonds of similar risk and maturity
the market yield was 10%, the price paid for the bonds was
$66 million interest is received semi-annually on June
30th and December 31st due to changing
market conditions the fair value of the
bonds at December 31st 2013
was seventy million. So requirement one we are to prepare the journal entry to record Fuzzy
Monkey's investments on January 1st 2013.
So same thing as we have been doing before, so we are going to record the investment on the
bonds
at the face amount of
eighty million
let me just format
my cell here.
Once again
it was bought at a discount, discount on bond investment
which is the difference and then we are going to record the cash that
we paid. Alright
so we paid 66 million
for the
80 million bonds our
discount that is going to be the difference of that of 14 million
dollars. So that what we needed for requirement
one, requirement two
are are to record
the entry for the interest Jun 30th
at the effective rate. So once again
we know there we're going to get cash in, so
once again these bonds yield 8%
but because we calculate the interest
semi-annually
that's twice you take the 8 divided by two
times the 80 million
Record that discount on bond investment
and we are going to record
the interest revenue.
interest revenue is
5% time the
66 million, plus
the 10%
It looks like I am jumping a little ahead here
this one isn't supposed to be here
I was looking a little bit ahead
so 5% instead of that 5% times
the 66 plus 10, it was supposed to be 5% times
66 million
So it will be 66 million
times five percent we get 3.3
million and our difference then is
100,000
four our discount on bonds. Ok so the requirement two was
lets just this was at June 30th
2013.
So for requirement three, this is a new
step that we haven't done yet.
We are required to prepare the journal entry by Fuzzy Monkey to record interest on December 31st
2013 at the effective rate.
Once again we will be debiting cash
for the four percent times the
eighty million
we will debit the discount on bond investment
which is our difference, and then we will be 
crediting interest revenue
with the five percent
times the 66 million
and we must
add in this hundred million of bond discount
100,000.
Alright so,
and if you're you're wondering why we are doing that, on page 
657, under the recognize investment revenue
area, it shows you the reasons why
we record
interest revenue under this method
and do it this way but because
the discounts from a previous interest
period its also considered
an initial investment
that interest must be
recorded along with that
66 million so we're
when we are recording interest revenue we are going to take that
66 million plus the 100,000 dollars in discount and that is going to be
considered
also into the 5%. So basically it will
be 66 million plus the 100,000 would be
66 million one hundred thousand
times .05
80 million
times .04
my difference will be...
the hundred and five thousand will be the discount on the bonds investment which is the difference.
Alright so
requirement 4 then
At what amount will Fuzzy Monkey its investment
in the December 31st 2013 balance sheet
and why so this is the same
concept as what we did here, over here
and lets see I'm going to just
copy this. I'm going to paste it here
But I am just going to say
Fuzzy Monkey here.
okay alright so 
in the balance sheet area you will see
investment on bonds and that investment is 
listed at eighty million.
We are going to subtract the 
discount on
bonds, bond investment
amortized 
cost then, will be the difference.
And lets just
write it here, and lets do this. Alright so we have 14 million initially
we're going to subract
the hundred thousand here
and we are going to subract
the hundred and five thousand here
I am not going to write these in, I don't think I am going to have room
you know where I got the numbers from. Okay
so I take 14 million, minus a
100,000, minus the hundred and five thousand
I should get 13
million seven hundred ninety five
dollars and my amortized cost then
is going to be the difference
between the two of
66 million two hundred and five thousand
so that is going to be my amortized cost
and this is how its going to look like in your balance sheet or
the balance sheet of Fuzzy
Monkey. Once again I am going to go and
just highlight it
so you know that that's the amount that is going to be, or this is how
it's going to look like in balance sheet of Fuzzy Monkey's balance sheet
and then once again
like a said before here, in this area
the increases and decreases in the fair
value between
at the time when the debt is required and
at the time on when the debt matures isn't
really
material or important
to the security mainly because the investor has
the intent of holding that security
until it matures so that the reason why
we classify
these as securities held to maturity. So basically that is problem 12-1
and hopefully after
the demonstration problems for p12-1
e12-1 and brief exercise 12-1
it makes a little more sense to you. I will post 
these, the notes here, I'll post the notes here
along with the video so that you can have a chance to
go ahead and print them out and use them for reference when you go ahead and
do your practice problem or your assigned homework.
If you have any questions feel free
to email me.
