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Chapter 12: 5BE (page 610)

Hendricks Corporation purchased trading investment bonds for \(50,000 at par. On December 31, Hendricks received an annual interest of \)2,000, and the fair value of the bonds was $47,400. Prepare Hendricks鈥� journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

Short Answer

Expert verified
  1. The amount debited to debt investment is $50,000.
  2. The amount of rent received is $2,000.
  3. The unrealized holding income is $2,600.

Step by step solution

01

Definition of the fair value adjustment

It is the process in which the book value and purchase price are adjusted.

02

Journal entry of the purchase of the investment

Date

Description

Debit

Credit

A.

Debt Investment

$50,000

Cash

$50,000

Being entry to record the purchase of bonds

03

Journal entry for the interest received

Date

Description

Debit

Credit

B

Cash

$2,000

Interest Revenue

$2,000

Being entry of rent received

04

Adjustment entry for the fair value

Date

Description

Debit

Credit

C

Unrealized holding loss- Income

$2,600

Fair value adjustment

$2,600

Being year-end adjustment entry of fair value

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