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Chapter 10: 10-9E_1 (page 569)

Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements

1. Journalize any required 2018 entries for the bond investment.

Short Answer

Expert verified

Both sides of the Journal total$1,133,000.

Step by step solution

01

Definition of Long-Term Investment

Long term investment can be defined as the asset or investment acquired with a view of holding it for more than one year.

02

Journal entry for 2018

Date

Accounts and explanation

Debit $

Credit $

2 Jan 2018

Held to maturity – debt investment

$1,100,000

Cash

$1,100,000

30 June 2018

Cash

$16,500

Interest revenue

$16,500

31 Dec 2018

Cash

$16,500

Interest revenue

$16,500

$1,133,000

$1,133,000

Working note:

Calculation of Interest Revenue:

Interestrevenue=Facevalue×Interestrate×612=$1,100,000×3%×612=$16,500

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Most popular questions from this chapter

When disposing of an available-for-sale debt investment, where is the gain or loss on disposal reported in the financial statements?

Identifying why companies invest and classifying investments

Garden Haven has excess cash of $15,000 at the end of the harvesting season. Garden Haven will need this cash in four months for normal operations.

Requirements

What type of classification would Garden Haven’s investment fall within—short-term or long-term? Why?

Accounting for equity investments

Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned a net income of \)90,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.)

Requirements

Post all 2018 transactions to the investment T-account. What is its balance after all the transactions are posted? How would this balance be classified on the balance sheet dated December 31, 2018?

On August 20, 2018, Mraz, Co. decides to invest excess cash of \(2,500 by purchasing Virginia, Inc. bonds. At year-end, December 31, 2018, the market price of the bonds was \)2,000. The investment is categorized as available-for-sale debt. Journalize the adjusting entry needed at December 31, 2018.

Question: S10-4 Accounting for equity investments

On January 1, 2018, Bryant, Inc. decides to invest in 3,750 shares of Farrier stock when the stock is selling for \(16 per share. On August 1, 2018, Farrier paid a \)0.70 per share cash dividend to stockholders. On December 31, 2018, Farrier reports net income of $50,000 for 2018. Assume Farrier has 15,000 shares of voting stock outstanding during 2018 and Bryant has significant influence over Farrier.

Requirements

Identify what type of investment the Farrier stock is for Bryant.

See all solutions

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