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Chapter 10: Q2SE_1 (page 567)

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

1. Journalize the transactions related to Chaucer鈥檚 investment in Lake Turner bonds during 2018.

Short Answer

Expert verified

Both sides of the Journal total$93,600.

Step by step solution

01

Definition of Bonds

Bonds can be defined as debt security issued with a specified maturity date and interest rate. Such securities require regular interest payment to their holders.

02

Journal Entries Related to Chaucer’s Investment

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2018

Held to maturity 鈥� Debt Investment

$90,000

Cash

$90,000

30 June 2018

Cash

$1,800

Interest revenue

$1,800

31 Dec 2018

Cash

$1,800

Interest revenue

$1,800

$93,600

$93,600

Working note:

Calculation of Interest:

Interestrevenue=Facevalue脳Interestrate脳612=$90,000脳4%脳612=$1,800

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Most popular questions from this chapter

What adjustment must be made at the end of the period for trading debt investments and available-for-sale debt investments?

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

1. Journalize the transactions for Bark鈥檚 investment in Roots鈥檚 stock.

How are held-to-maturity debt investments reported on the financial statements?

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

What type of information in the financial reports would have helped the bank detect this reclassification?

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

What type of classification would Garden Haven鈥檚 investment fall within鈥攕hort-term or long-term? Why?
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