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Chapter 10: 10-9E_1 (page 569)

Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements

1. Journalize any required 2018 entries for the bond investment.

Short Answer

Expert verified

Both sides of the Journal total$1,133,000.

Step by step solution

01

Definition of Long-Term Investment

Long term investment can be defined as the asset or investment acquired with a view of holding it for more than one year.

02

Journal entry for 2018

Date

Accounts and explanation

Debit $

Credit $

2 Jan 2018

Held to maturity 鈥� debt investment

$1,100,000

Cash

$1,100,000

30 June 2018

Cash

$16,500

Interest revenue

$16,500

31 Dec 2018

Cash

$16,500

Interest revenue

$16,500

$1,133,000

$1,133,000

Working note:

Calculation of Interest Revenue:

Interestrevenue=Facevalue脳Interestrate脳612=$1,100,000脳3%脳612=$16,500

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Most popular questions from this chapter

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?

Briefly describe the specific types of debt and equity securities.

9 Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements

3. How much interest revenue will Advance report during 2018 on this bond investment?

Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh鈥檚 Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit鈥檚 bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term.

Requirements

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

On January 1, 2018, the College Corporation decides to invest in Small Town bonds. The bonds mature on December 31, 2022, and pay interest of 4% on June 30 and December 31. The market rate of interest was 4% on January 1, 2018, so the $20,000 maturity-value bonds sold for face value. College Corporation intends to hold the bonds until maturity. Journalize the transactions related to College Corporation鈥檚 investment in Small Town bonds during 2018.
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