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Chapter 10: Q. 5SE_1 (page 568)

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

1. Journalize the transactions for Bell鈥檚 investment in Grant, Inc. for 2018.

Short Answer

Expert verified

Both sides of the journal totals $19,600.

Step by step solution

01

Definition of Unrealized Gains

The increase in the asset鈥檚 value that is still in possession of the business entity or individual is known as unrealized gain. It is reported as anothercomprehensive income.

02

Journal Entries

Date

Accounts and Explanation

Debit $

Credit $

1 Feb 2018

Trading debt investment

$16,800

Cash

$16,800

31 Dec 2018

Fair value adjustment 鈥� Trading debt

$2,800

Unrealized holding gains

$2,800

$19,600

$19,600

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Most popular questions from this chapter

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

Post all 2018 transactions to the investment T-account. What is its balance after all the transactions are posted? How would this balance be classified on the balance sheet dated December 31, 2018?

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Strategic Investments completed the following investment transactions during 2018:

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Accounting for equity investments

Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned net income of \)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

1. What method should East Cost Motors use to account for the investment in Boxcar Motors? Give your reasoning.

See all solutions

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