On January 1, 2019, Garfield AG made an investment in €70,000 of the 9%, 5-year bonds of Chester Corporation for €74,000, which provides an 11% return. Garfield plans to actively trade the bonds to profit from market interest rate changes. Prepare Garfield's journal entries for (a). the purchase of the investment, (b). the receipt of annual interest and discount amortization, and (c). the year-end fair value adjustment. The bonds have a year-end fair value of €76,000.

On January 1, 2019, Garfield AG made an investment in €70,000 of the 9%, 5-year bonds of Chester Corporation for €74,000, which provides an 11% return. Garfield plans to actively trade the bonds to profit from market interest rate changes. Prepare Garfield's journal entries for (a). the purchase of the investment, (b). the receipt of annual interest and discount amortization, and (c). the year-end fair value adjustment. The bonds have a year-end fair value of €76,000.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Capital Gain

Any capital asset when sold can give the seller a higher or lower price from its purchase price leading to a capital gain or capital loss. The time period of holding an asset is decided based on if it is a long term or short-term capital gain. On that basis, the rate of taxation is decided if it is 20%, 15% or according to the tax brackets. The rate of taxation differs in the case of equity or debt, whether long or short term. The capital gain can be adjusted from capital loss to arrive at a net capital gain. The amount of gains and the exemption has to be reported in the tax return filed in the financial year in which the asset was transferred. The tax return can be filed quarterly, monthly, semi-annually or annually.

Question

1- On January 1, 2019, Garfield AG made an investment in
€70,000 of the 9%, 5-year bonds of Chester Corporation for
€74,000, which provides an 11% return. Garfield plans to
actively trade the bonds to profit from market interest rate
changes.
Prepare Garfield's journal entries for
(a). the purchase of the investment,
(b). the receipt of annual interest and discount amortization,
and
(c). the year-end fair value adjustment. The bonds have a
year-end fair value of €76,000.

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