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Chapter 10: Q.11E_1 (page 569)

Question: E10-11 Accounting for debt investments

Peyton Investments completed the following investment transactions during 2018:

2018

Jan. 5 Purchased Vedder Company鈥檚 \(400,000 bond at face value. Peyton classified the investment as available-for-sale. The Vedder bond pays interest at the annual rate of 4% on June 30 and December 31 and matures on December 31, 2021. Management鈥檚 intent is to keep the bonds for several years.

Jun. 30 Received an interest payment from Vedder.

Dec. 31 Received an interest payment from Vedder.

31 Adjusted the investment to its current market value of \)396,000

Requirements

Journalize Peyton鈥檚 investment transactions. Explanations are not required.

Short Answer

Expert verified

Answer

Both sides of the journal total$420,000.

Step by step solution

01

Definition of Market Value

The price at which the asset can be traded freely in the market without any force is known as market value. Such value is decided by the market factors such asdemand, supply, and market conditions.

02

Journal entries

Date

Accounts and Explanation

Debit $

Credit $

5 Jan 2018

Available for sale 鈥� Debt investment

$400,000

Cash

$400,000

30 June 2018

Cash

$8,000

Interest Revenue

$8,000

31 Dec 2018

Cash

$8,000

Interest Revenue

$8,000

31 Dec 2018

Unrealized loss on available for sale securities

$4,000

Fair value adjustment

$4,000

$420,000

$420,000

calculation of interest revenue:

interest revenue: principal x interest rate x 6100

=$400,000脳4%脳612=$8000

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Most popular questions from this chapter

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: E10-9 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: P10-20A Accounting for equity investments

The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:

Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.

May 15 Received a cash dividend of \(0.61 per share on the Lili investment.

Dec. 15 Received a cash dividend of \)70,000 from Evan investment.

31 Received Evan鈥檚 annual report showing \(300,000 of net income.

31 Received Lili鈥檚 annual report showing \)120,000 of net income for the year.

31 Evan鈥檚 stock fair value at year-end was \(390,000.

31 Lili鈥檚 common stock fair value at year-end was \)12 per share.

Requirements

3. Prepare Waterfall Source鈥檚 partial balance sheet at December 31, 2018, from your answers in Requirement 2.

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon.

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment.

Sep. 16 Sold the Naradon stock for \(13.70 per share.

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term.

Dec. 31 Received a \(600 interest payment from Purple.

31 Adjusted the Purple bond to its market value of \)44,000.

Requirements

3. Prepare T-accounts for the investment assets, and show how to report the investments on Captain Transfer鈥檚 balance sheet at December 31, 2018.

Question: Where on the financial statements is an unrealized holding gain or loss on trading debt investments reported?
See all solutions

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