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Chapter 10: Q. 6SE_1 (page 568)

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

Journalize the transactions for Josh鈥檚 investment in Jackrabbit, Inc. for 2018.

Short Answer

Expert verified

Both sides of the journal totals $57,600.

Step by step solution

01

Definition of Available for Sale Investment

The investment made by the business entity in the security to sell them before they reach their maturity is known asavailable for sale investment.

02

Journal Entry for Investment

Date

Accounts and Explanation

Debit $

Credit $

1 June 2018

Available for sale 鈥� Debt investment

$54,400

Cash

$54,400

31 Dec 2018

Unrealized holding loss 鈥� Debt investment

$3,200

Fair value adjustment 鈥� Debt investment

$3,200

$57,600

$57,600

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Most popular questions from this chapter

Question: Wild Adventure conducts tours of wildlife reserves around the world. The company recently purchased a lodge in Adelaide, Australia, securing a 4% mortgage from First Bank. In addition to monthly payments, Wild Adventure must provide annual reports to the bank showing that the company has a current ratio of 1.2 or better. After reviewing the annual reports, the CEO, N. O. Scrooge, approached Carl Hauptfleisch, the CFO, and stated, 鈥淲e鈥檝e decided we are going to move all our long-term debt investments into our brokerage account so we can sell them soon. Carl, go ahead and make the adjusting entries as of the current year-end.鈥� Carl made the adjustments even though he doesn鈥檛 think the company will actually go ahead with the planned sale of the long-term debt investments. The subsequent year, the economy turned, and the company鈥檚 travel revenues dropped more than 60%. Wild Adventure eventually defaulted on the First Bank loan.

Requirements

Has a fraud occurred? If so, what is the fraud?

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

1. Classify each of the investments made during 2018. (Assume the equity investments represent less than 20% of the ownership of outstanding voting stock.)

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?

On May 15, 2018, Mayer Co. invests \(8,000 in John, Inc. stock. John pays Mayer a \)200 dividend on November 15, 2018. Mayer sells the John stock on December 10, 2018, for $7,500. Assume the Mayer Co. does not have significant influence over John, Inc. Journalize the 2018 transactions related to Mayer鈥檚 investment in John stock.

What does the rate of return on total assets measure, and how is it calculated?
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