Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Chapter 13, Problem 10P

Investment in Available-for-Sale Bonds The following information relates to Starr Company’s investment in available-for-sale bonds for 2019:

Chapter 13, Problem 10P, Investment in Available-for-Sale Bonds The following information relates to Starr Companys

Required:

  1. 1. Prepare journal entries to record the previous information for 2019. Use the effective interest method and round all amounts to the nearest dollar. Assume that Starr prepares semiannual financial statements.
  2. 2. Show the items of income or loss from investment transactions that Starr reports for each 2019 semiannual income statement.
  3. 3. Show how the investment items are reported on each of the 2019 semiannual balance sheets, assuming that management expects to dispose of all investments with in one year of purchase.

1.

Expert Solution
Check Mark
To determine

Record the journal entries in the books of Company S for the year 2019.

Explanation of Solution

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Record the journal entries in the books of Company S for the year 2019.

DateAccount Title and Explanation

Debit

($)

Credit ($)
January 1, 2019Investment in Available-for-sale Securities29,100 
     Cash 29,100
 (To record the purchase of Available-for-sale securities at discount)  
    
January 1, 2019Investment in Available-for-sale Securities40,400 
     Cash 40,400
 (To record the purchase of Available-for-sale securities at premium)  
    
June 30, 2019Cash ($30,000×0.08×12)1,200 
     Investment in Available-for-    sale Securities255 
     Interest income     ($29,100×0.10×12) 1,455
 (To record the earned interest and amortization of discount)  
    
June 30, 2019Cash ($40,000×0.10×12)2,000 
     Investment in Available-for-    sale Securities20
     Interest income     ($40,400×0.098×12) 1,980
 (To record the earned interest and amortization of premium)  
    
June 30, 2019Allowance for change in fair value of investment (1)225  
     Unrealized holding gain/loss:     Available-for-sale securities 225
 (To adjust the allowance and the unrealized gain on holding the Securities)  
    
July 1, 2019Investment in Available-for-sale Securities23,000 
     Cash 23,000
 (To record the purchase of Available-for-sale securities at discount)  
November 30, 2019Interest receivable ($25,000×0.11×512)1,146 
 Investment in Available-for-    sale Securities4 
     Interest income     ($23,000×0.12×512) 1,150
 (To record the interest earned for 5 months)  
    
November 30, 2019Cash ($22,750+$1,146)23,896 
 Loss on sale of Available-for-sale Securities254 
         Investment in Available-for-sale Securities 23,004
       Interest receivable 1,146
 (To record the sale of Corporation W's bond on loss)  
    
December 31, 2019Cash ($30,000×0.08×12)1,200 
 Investment in Available-for-sale Securities268 
     Interest income     `    ($29,355×0.10×12) 1,468
 (To record the earned interest and amortization of discount)  
December 31, 2019Cash ($40,000×0.10×12)2,000 
 Investment in Available-for-sale Securities21
     Interest income     ($40,380×0.098×12) 1,979
 (To record the earned interest and amortization of premium)  
    
December 31, 2019Cash40,800 
 Gain on sale of Available-for-sale Securities ($40,800$40,359)441
 Investment in Available-for-sale Securities ($40,380$21) 40,359
 (To record the sale of Company M's bond at gain)  
    
December 31, 2019Unrealized holding gain/loss: Available-for-sale securities420  
     Allowance for change in fair     value     of investment 420
 (To reverse the allowance and  the unrealized gain, that has been allowed earlier on June 30, 2019)  
    
December 31, 2019Unrealized holding gain/loss: Available-for-sale securities628  
     Allowance for change in fair     value     of investment 628
 (To adjust the allowance and the unrealized loss on holding the Securities)  

Table (1)

Working note (1):

Calculate the allowance for change in fair value of investment:

SecurityBook valueFair valueChange in fair value
Corporation B’s bond of $30,000$29,355 (2)$29,160$(195)
Corporation M’s bond of $40,000$40,380 (3)$40,800$420
Total$69,735$69,960$225

Table (2)

Working note (2):

Calculate the book value of Corporation B:

Book value of Corporation B=(Fair value of the bond+Amortization of discount)=($29,100+$255)=$29,355

Working note (3):

Calculate the book value of Corporation M:

Book value of Corporation M=(Fair value of the bondAmortization of premium)=($40,400$20)=$40,380

2.

Expert Solution
Check Mark
To determine

Show the items that would be reported as income or loss from the investment in the income statement.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Income statement
For semi-annual period ended
Particulars06/30/201912/31/2019
Interest income$3,435(4)$4,597(5)
Loss on sale of securities-($254)
Gain on sale of securities-$441

Table (3)

Working note (4):

Calculate the amount of interest income for 06/30/2019:

Interest income=($1,455+$1,980)=$3,435

Working note (5):

Calculate the amount of interest income for 12/31/2019:

Interest income=($1,150+$1,468+$1,979)=$4,597

3.

Expert Solution
Check Mark
To determine

Show the way in which the investments items are reported in the 2019 semi-annual balance sheets.

Explanation of Solution

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Show the way in which the investments items are reported in the 2019 semi-annual balance sheets.

Balance sheet  (Partial)
Particulars06/30/201912/31/2019
Current assets:  
Investment in available-for-sale securities$69,735$29,623
Add(Less): Allowance for change in fair value of investment$225$(823)
Investment in available-for-sale securities$69,960$28,800
Shareholders’ equity:  
Accumulated other comprehensive income:  
Unrealized holding gain/loss:  
Available for sale securities$225($823)

Table (4)

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Chapter 13 Solutions

Intermediate Accounting: Reporting And Analysis

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