91Ó°ÊÓ

(Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt

securities investments of Wildcat Company.

1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of \(300,000 at 100 plus accrued interest.

Interest is payable on April 1 and October 1.

2. On April 1, semiannual interest is received

3. On July 1, 9% of bonds of Sampson, Inc. were purchased. These bonds with a par value of \)200,000 were purchased at 100

plus accrued interest. Interest dates are June 1 and December 1.

4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.

5. On October 1, semiannual interest is received.

6. On December 1, semiannual interest is received.

7. On December 31, the fair value of the bonds purchased February 1 and July 1 were 95 and 93, respectively.

Instructions

(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are

available-for-sale securities.

(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).

Step by step solution

01

Necessary journal entries

Date	Particulars	Debit	Credit
February 1	Debt investment	$300,000
	Interest Revenue	$10,000
	Cash		$310,000
	(Being entry for the record of purchase)
April 1	Cash	$15,000
	Interest received		$15,000
	(Being entry for rent received)
July 1	Debt investment	$200,000
	Interest Revenue	$1,500
	Cash		$201,500
	(Being entry for the record of purchase)
September 1	Cash	$61,900
	Loss on sale of investment	$600
	Debt investment		$60,000
	Interest Revenue		$2,500
	(Being entry for the record of the sale of investment)
October 1	Cash	$12,000
	Interest Revenue		$12,000
	(Entry of the rent received)
December 1	Cash	$9,000
	Rent Revenue		$9,000
	(Being entry of the rent revenue)
December 31	Interest Receivable	$7,500
	Interest Revenue		$7,500
	(Being entry for the accrued interest)
December 31	Unrealized Holding Loss	$26,000
	Fair Value adjustment		$26,000
	(Entry for the fair value adjustment)

02

Treatment if securities are held-to-maturity securities

In this case, all the entries are the same, but the fair value adjustment entry is not made. Because in the held-to-maturity securities,the only amount of collection is considered.

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