Question 1: (2 marks)

Vista company invested $12,180,000 (11,640,000) to purchase $12,000,000, 10%, 10-year

bonds issued by Lago company on December 1, 2020. The bonds were dated December 1,
2019 and pay interest semi-annually on June 1 and December 1. Vista and Lago use straight-
line amortization for bond premium or discount. Financial statements of both companies are
prepared annually on December 31.

Instructions

Prepare the journal entries for both companies on the following dates:
(a) 1st December 2020.
(b) 31st December 2020.
(c) 1st June 2021.

SOLUTION:

LAGO

(a) Prepare the journal entry to record the issuance of the bonds on December 1, 2020.

Dec. 1 Cash 12,180,000

Premium on Bonds Payable 180,000
Bonds Payable 12,000,000

(b) Prepare the journal entry to accrued bond interest on December 31, 2020.

Dec. 31 Interest Expense (= 100,000 – 1,500) 98,500

Premium on Bonds Payable (180,000/10/12*1) 1,500
Interest Payable (12,000,000*10%/12*1) 100,000

(c) Prepare the journal entry to record the interest payment on June 1, 2021.

Jun. 1 Interest Payable 100,000

Interest Expense (= 600,000 – 100,000 – 7,500) 492,500
Premium on Bonds Payable (180,000/10/12*5) 7,500
Cash (12,000,000 * 10% / 2) 600,000

VISTA
(a) Prepare the journal entry to record the acquisition of the bonds on December 1, 2020.

Dec. 1 Debt Investments 12,180,000

Cash 12,180,000

(b) Prepare the journal entry to record interest revenue on December 31, 2020.

Dec. 31 Interest Receivable 100,000

Debt Investments 1,500
Interest Revenue 98,500

(c) Prepare the journal entry to record the interest received on June 1, 2021

Jun. 1 Cash 600,000

Interest Receivable 100,000
Debt Investments 7,500
Interest Revenue 492,500

(Question 2: (3 marks)

Pieces Company used the following information in recording its bank reconciliation for the
month of March.
Balance per books March 31 $ 21,850
Balance per bank statement March 31 $ 26,607
_________________________________________________________________________________________________________________

(1) The bank collected a note receivable for the company of $4,500 plus $135 interest
revenue. UPDATE
(2) Check No. 302 for $290 was correctly issued and paid by bank but was recorded
as $920 in the cash payments journal. UPDATE
(3) NSF check of customer returned by bank $730. UPDATE
(4) Bank statement has a check of $3,200 that was issued by another company, not
Pieces Co.
(5) Bank commission charge for March was $78. UPDATE
(6) Checks written in March but still outstanding $6,300.
(7) Deposits of March 31 not yet recorded by bank $2,800.
Instructions
1. Prepare a bank reconciliation at March 31. (2 marks)
2. Prepare adjusting entries as needed. (1 mark)
SOLUTION
Solution for requirement 1:

PIECES/ BANK RECONCILIATION/ MARCH 31

Cash balance per books $ 21,850
Add:
(1) Note receivable and interest collected 4,635
(2) Error on recording cheque 630
Less:
(3) NSF/ Dishonoured cheque (730)
(5) Bank commission charge (78)
Adjusted cash balance per books 26,307
Add:
(6) Outstanding cheque 6,300
Less:
(7) In-transit deposit (2,800)
(4) Error on recording cheque issued by other comp. (3,200)
Cash balance as per bank 26,607

Solution for requirement 2:

(1) Cash .............................................4,635
Notes receivable.......................................4,500
Interest revenue...........................................135
(2) Cash ................................................630
Accounts payable.........................................630
(3) Accounts Receivable.........................730
Cash .......................................................... 730
(4) Bank commission charge expense......78
Cash...............................................................78
Question 3: (3 marks)

The following information is available for Latinos Corporation for the year ended December
31, 2020:
Depreciation expense 14,000
Purchase 10-year bonds issued by a partner company 45,000
Proceeds from the sale of land which has book value of $52,000 61,000
Issuance of preferred stock for cash 52,000
Redemption of a long-term debt 75,000
Net income 86,000
In addition, the following information is available from the comparative balance sheet for
Latinos at the end of 2020 and 2019:
2020 2019
Cash $90,900 $11,700
Accounts receivable (net) 15,100 9,700
Inventory 4,700 8,200
Accounts payable 14,300 19,800
Salary payable 10,200 7,600
Instructions
Prepare Latinos' statement of cash flows for the year ended December 31, 2020, using
the indirect method.

SOLUTION:
LATINOS CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income .................................................................................... $86,000
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation expense............................................................. $14,000
Gain on disposal of land........................................................ (9,000)
Decrease in inventory ........................................................... 3,500
Increase in accounts receivable ............................................. (5,400)
Decrease in accounts payable ............................................... (5,500)
Increase in salary payable ..................................................... 2,600 200
Net cash provided by operating activities ............................ 86,200
Cash flows from investing activities
Proceeds from the sale of land ....................................................... 61,000
Purchase 10-year bonds.................................................................. (45,000)
Net cash provided by investing activities ............................. 16,000
Cash flows from financing activities
Issuance of preferred stock ............................................................ 52,000
Redemption of a long-term debt..................................................... (75,000)
Net cash used by financing activities .................................. (23,000
Increase in cash .................................................................................... 79,200
Cash at beginning of period .................................................................... 11,700
Cash at end of period .............................................................................. $90,900