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Chapter 10: 10-10E_2 (page 569)

Accounting for debt investments

League Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $900,000 of CocoCorp bonds at face value on January 2, 2018. The CocoCorp bonds pay interest at the annual rate of 8% on June 30 and December 31 and mature on December 31, 2022. League Up intends to hold the investment until maturity.

Requirements

2. Journalize the following on League Up鈥檚 books:

a. Receipt of final interest payment on December 31, 2022.

b. Disposition of the investment at maturity on December 31, 2022

Short Answer

Expert verified

Interest revenue for a period of 6 months is equal to$36,000.

Step by step solution

01

Definition of Corporate Bonds

The security issued by the business units to the investors for generating cash to fulfil capital requirements is known as a corporate bond. It is a type of debt security that requires regular interest payment.

02

Journal Entry for Final Interest Receipt

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2022

Cash

$36,000

Interest revenue

$36,000

Working note:

Calculation of Interest revenue:

Interestrevenue=Facevalue脳Interestrate脳612=$900,000脳8%脳612=$36,000

03

Journal Entry for Disposition of Investment at Maturity

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2022

Cash

$900,000

Held to maturity 鈥� debt investment

$900,000

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Most popular questions from this chapter

Accounting for equity investments

Captain Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 200 shares of Velcon stock, paying \(53 per share. The investment represents 4% ownership in Velcon鈥檚 voting stock. Captain does not have significant influence over Velcon. Captain intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.28 per share on the Velcon stock.

Dec. 31 Adjusted the Velcon investment to its current market value of $58.

Requirements

What account(s) and amount(s), if any, would be reported on Captain鈥檚 income statement for the year ended December 31, 2018?

Question: S10-5 Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of \(16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was \)19,600. The investment is categorized as a trading debt investment.

Requirements

What was the net effect of the investment on Bell鈥檚 net income for the year ended December 31, 2018?

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon.

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment.

Sep. 16 Sold the Naradon stock for \(13.70 per share.

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term.

Dec. 31 Received a \(600 interest payment from Purple.

31 Adjusted the Purple bond to its market value of \)44,000.

Requirements

3. Prepare T-accounts for the investment assets, and show how to report the investments on Captain Transfer鈥檚 balance sheet at December 31, 2018.

Accounting for equity investments

On January 1, 2018, Bark Company invests \(10,000 in Roots, Inc. stock. Roots pays Bark a \)400 dividend on August 1, 2018. Bark sells the Roots鈥檚 stock on August 31, 2018, for $10,450. Assume the investment is categorized as a short-term equity investment and Bark Company does not have significant influence over Roots, Inc.

Requirements

2. What was the net effect of the investment on Bark鈥檚 net income for the year ended December 31, 2018?

Accounting for equity investments

Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned a net income of \)90,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.)

Requirements

2. Journalize all required 2018 transactions related to East Cost Motors鈥檚 Boxcar investment. Include an explanation for each entry.

See all solutions

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