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Chapter 10: Q3RQ. (page 566)

Why would a company invest in debt or equity securities?

Short Answer

Expert verified

Investment is made in debt and equity securitiesto generate benefits from excess cash and achieve goals.

Step by step solution

01

Definition of Investment

Investment refers to acquiring any asset to generate income or gain from the increase in value. It might be acquired for generating regular income or to generate a long-term gain.

02

Investment in Debt or Equity Securities by Companies

  1. Businesses invest in debt and equity to generate income through dividends and interest from the excess cash available to them that cannot be utilized in normal business operations.
  2. Another purpose for investing in debt and equity is to achieve business goals. It includes goals such as harmonizing relations with the vendors by accepting debt securities.

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Most popular questions from this chapter

Briefly describe the specific types of debt and equity securities.

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.

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

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

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

Accounting for debt investments

Suppose Solomon Brothers purchases $500,000 of 6% annual bonds of Morin 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. Solomon intends to hold the Morin bond investment until maturity.

Requirements

Journalize the entry required on the Morin bonds maturity date. (Assume the last interest payment has already been recorded.)
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