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Chapter 10: Q. 5SE_2 (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

2. In what category and at what value would Bell report the asset on the December 31, 2018, balance sheet? In what account would the market price change in Grant鈥檚 bond be reported, if at all?

Short Answer

Expert verified

Trading debt investment on the asset side: $19,600.

Net income (Other comprehensive income):$2,800.

Step by step solution

01

Definition of Other Comprehensive Income

The income that includes the gains and losses that are not realized and occurred to the increase or decrease in the fair value of the asset held is known asother comprehensive income.

02

Reporting Asset and its Fair Market Value

The business entity will report bonds of $19,600 on the asset side of the balance sheet as Trading debt investment. The unrealized holding gains of $2,800 will be included in thenet income of the business entity.

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Most popular questions from this chapter

Accounting for equity investments

Money Man Investments completed the following transactions during 2018:

Jan. 14 Purchased 400 shares of Technomite stock, paying \(56 per share. The investment represents 25% ownership in Technomite鈥檚 voting stock and Money Man has significant influence over Technomite. Money Man intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.27 per share on the Technomite stock.

Dec. 31 Technomite鈥檚 current market value is \(51 per share.

31 Technomite reported net income of \)180,000 for the year ended 2018.

Requirements

1. Journalize Money Man鈥檚 transactions. Explanations are not required.

As a result of the recent mortgage crisis, many banks reported record losses to their mortgage receivables and other assets based on the decline in these assets鈥� fair values.

Requirements

1. What would the effect be to stakeholders if such losses were not reported in a timely way?

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?

Question: P10-23B Accounting for equity investments

The beginning balance sheet of Text Source Co. included a \(700,000 investment in Taylor stock (20% ownership).

During the year, Text Source completed the following investment transactions:

Mar. 3 Purchased 5,000 shares at \)13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.

May 15 Received a cash dividend of \(0.69 per share on the Josh investment.

Dec. 15 Received a cash dividend of \)100,000 from Taylor investment.

31 Received Taylor鈥檚 annual report showing \(100,000 of net income.

31 Received Josh鈥檚 annual report showing \)620,000 of net income for the year.

31 Taylor鈥檚 stock fair value at year-end was \(620,000.

31 Josh鈥檚 common stock fair value at year-end was \)14 per share.

Requirements

Where is the unrealized holding gain or loss associated with the Josh stock reported?

Accounting for equity investments

Money Man Investments completed the following transactions during 2018:

Jan. 14 Purchased 400 shares of Technomite stock, paying \(56 per share. The investment represents 25% ownership in Technomite鈥檚 voting stock and Money Man has significant influence over Technomite. Money Man intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.27 per share on the Technomite stock.

Dec. 31 Technomite鈥檚 current market value is \(51 per share.

31 Technomite reported net income of \)180,000 for the year ended 2018.

Requirements

Classify and prepare partial financial statements for Money Man鈥檚 25% Technomite investment for the year ended December 31, 2018.
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