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Chapter 10: Q.10RQ (page 566)
Question: Where on the financial statements is an unrealized holding gain or loss on trading debt investments reported?
Answer
Unrealized holding gains or losses arereported on the income statement.
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What is a debt security?
Accounting for debt investments
On January 1, 2018, the Chaucer鈥檚 Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer鈥檚 intends to hold the bonds until December 31, 2023.
Requirements
In what category would Chaucer鈥檚 report the investment on the December 31, 2018, balance sheet?
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
1. Journalize any required 2018 entries for the bond investment.
S10-1 Identifying why companies invest and classifying investments
Garden Haven has excess cash of $15,000 at the end of the harvesting season. Garden Haven will need this cash in four months for normal operations.
Requirements
1. What are some reasons why Garden Haven may choose to invest in debt or equity securities?
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. |
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