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Chapter 10: Q.10-21PGB_1 (page 573)

Question: P10-21B Accounting for debt investments

Suppose Hale and Sons purchases $800,000 of 3.5% annual bonds of Tyson Way Corporation at face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2022. Hale and Sons intends to hold the Tyson Way bond investment until maturity.

Requirements

1. Journalize Hale and Sons鈥檚 transactions related to the bonds for 2018.

Short Answer

Expert verified

Answer

Both sides of the journal totals$828,000.

Step by step solution

01

Definition of Principal Amount

The actual amount of money transferred to the borrower by the lender is known as the principal amount. The interest is charged on this amount only.

02

Journal Entries for the Transaction

Date

Accounts and Explanation

Debit $

Credit $

Jan 1, 2018

Held to maturity 鈥� debt investment

$800,000

Cash

$800,000

June 30, 2018

Cash

$14,000

Interest revenue

$14,000

Dec 31, a2018

Cash

$14,000

Interest revenue

$14,000

$828,000

$828,000

Calculation of Interest revenue:

颈苍迟别谤别蝉迟谤别惫别苍耻别=辫谤颈苍肠颈辫补濒脳颈苍迟别谤别蝉迟谤补迟别脳612=$800,000脳3.5%612=$14,000

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Most popular questions from this chapter

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?

Accounting for equity investments

On January 1, 2018, Bark Company invests \(10,000 in Roots, Inc. stock. Roots pays Bark a \)400 dividend on August 1, 2018. Bark sells the Roots鈥檚 stock on August 31, 2018, for $10,450. Assume the investment is categorized as a short-term equity investment and Bark Company does not have significant influence over Roots, Inc.

Requirements

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

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.

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: 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

Journalize the transactions for the year of Text Source.

See all solutions

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