91Ó°ÊÓ

(Debt and Equity Investments) Cardinal Paz Corp. carries an account in its general ledger called Investments,which contained debits for investment purchases, and no credits, with the following descriptions.

Feb. 1, 2017 Sharapova Company common stock, \(100 par, 200 shares \) 37,400

April 1 U.S. government bonds, 11%, due April 1, 2027, interest payable

April 1 and October 1, 110 bonds of \(1,000 par each 110,000

July 1 McGrath Company 12% bonds, par \)50,000, dated March 1, 2017,

purchased at 104 plus accrued interest, interest payable

annually on March 1, due March 1, 2037, 54,000

(Round all computations to the nearest dollar.)

(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that the debt securities are classified

as available-for-sale.

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2017, using the

straight-line method.

(c) The fair values of the investments on December 31, 2017, were:

Sharapova Company common stock \( 31,800

U.S. government bonds 124,700

McGrath Company bonds 58,600

What entry or entries, if any, would you recommend be made?

(d) The U.S. government bonds were sold on July 1, 2018, for \)119,200 plus accrued interest. Give the proper entry.

Step by step solution

01

Entry for the purchase of Debt and equity investment

Date	Particulars	Debit	Credit
February 1, 2017	Debt Investment	$162,000
	Equity Investment	$37,400
	Interest Revenue	$2,000
	Investment		$201,400
	(To record the investment)

02

Entry for the accrues interest and amortization of premium

Date	Particulars	Debit	Credit
February 1, 2017	Interest Receivables	$8,025
	Debt Investment		$51
	Interest Revenue		$7,974
	(To record accrual interest and amortization of premium)

Notes:

Accrued Interest	$5,000
Less: Amortization of premium	($51)
Accrued Interest	$3,025
Total accrued interest	$7,974

03

Fair value adjustment

Date	Particulars	Debit	Credit
December 31, 2017	Fair value adjustment	$13,700
	Unrealized holding income		$13,700
	(Being adjustment of securities)

04

Entry for the sale of investment

Date	Particulars	Debit	Credit
July 1, 2018	Cash	$124,700
	Interest Revenue		$5,500
	Gain on sale of investment		$9,200
	Debt investment		$110,000
	(Being entry for the sale of investment)

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