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Chapter 10: 2TI (page 550)

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.

Short Answer

Expert verified

Both sides of the journal total$20,800.

Step by step solution

01

Definition of Interest Revenue

The benefits generated by interest fees charged on the amount given as a loan are known as interest revenue. It is calculated based on the specified percentage.

02

Journal Entries for Recording Investment

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2018

Held-to-maturity debt investment

$20,000

Cash

$20,000

30 June 2018

Cash

$400

Interest revenue

$400

31 Dec 2018

Cash

$400

Interest revenue

$400

Total

$20,800

$20,800

Working note:

Interestrevenue=Principal脳Interestrate脳612=$20,000脳4%脳612=$400

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Most popular questions from this chapter

Match the key term to the scenario.

1. Available-for-sale debt investments.

a. Jane owns 53% of Richard鈥檚 Roses鈥檚 voting stock.

2. Controlling interest equity investments.

b. Joe owns debt security in Bones, Inc. and intends to hold it until maturity.

3. Trading debt investments.

c. Jeannie owns a debt security in Cricket, Inc. and plans on selling the debt after one year.

4. Held-to-maturity debt investments.

d. Jimenez owns 5% of Delgado, Inc.鈥檚 voting stock but does not have the ability to participate in the decisions of Delgado, Inc.

5. Significant influence on equity investments.

e. Jacob owns 24% of Pay, Inc.鈥檚 voting stock and has the ability to exert influence over Pay, Inc.

6. No significant influence on equity investments.

f. Jim owns a debt security in Tag, Inc.鈥檚 and plans on holding the debt for only a week.

When disposing of an available-for-sale debt investment, where is the gain or loss on disposal reported in the financial statements?

Computing rate of return on total assets

Montane Exploration Company reported these figures for 2018 and 2017:

Income statement: Partial

2018

2017

Interest expenses

\(16,700,000

\)16,500,000

Net income

16,900,000

20,200,000

Balance sheet: Partial

Dec 31, 2018

Dec 31, 2017

Total assets

\(316,000,000

\)420,000,000

Compute the rate of return on total assets for 2018. (Round to two decimals.)

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

How much cash interest will Advance receive each year from FermaCo?

Classifying and accounting for debt and equity investments

Jetway Corporation generated excess cash and invested in securities as follows: 2018

Jul. 2 Purchased 4,200 shares of Pogo, Inc. common stock at \(12.00 per share. Jetway plans to sell the stock within three months, when the company will need the cash for normal operations. Jetway does not have significant influence over Pogo.

Aug. 21 Received a cash dividend of \)0.80 per share on the Pogo stock investment.

Sep. 16 Sold the Pogo stock for \(13.40 per share.

Oct. 1 Purchased a Violet bond for \)20,000 at face value. Jetway classifies the investment as trading and short-term.

Dec. 31 Received a \(100 interest payment from Violet.

31 Adjusted the Violet bond to its market value of \)22,000.

Requirements

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

See all solutions

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