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Chapter 10: 2TI (page 550)

On January 1, 2018, the College Corporation decides to invest in Small Town bonds. The bonds mature on December 31, 2022, and pay interest of 4% on June 30 and December 31. The market rate of interest was 4% on January 1, 2018, so the $20,000 maturity-value bonds sold for face value. College Corporation intends to hold the bonds until maturity. Journalize the transactions related to College Corporation’s investment in Small Town bonds during 2018.

Short Answer

Expert verified

Both sides of the journal total$20,800.

Step by step solution

01

Definition of Interest Revenue

The benefits generated by interest fees charged on the amount given as a loan are known as interest revenue. It is calculated based on the specified percentage.

02

Journal Entries for Recording Investment

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2018

Held-to-maturity debt investment

$20,000

Cash

$20,000

30 June 2018

Cash

$400

Interest revenue

$400

31 Dec 2018

Cash

$400

Interest revenue

$400

Total

$20,800

$20,800

Working note:

Interestrevenue=Principal×Interestrate×612=$20,000×4%×612=$400

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Most popular questions from this chapter

Question: P10-23B Accounting for equity investments

The beginning balance sheet of Text Source Co. included a \(700,000 investment in Taylor stock (20% ownership).

During the year, Text Source completed the following investment transactions:

Mar. 3 Purchased 5,000 shares at \)13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.

May 15 Received a cash dividend of \(0.69 per share on the Josh investment.

Dec. 15 Received a cash dividend of \)100,000 from Taylor investment.

31 Received Taylor’s annual report showing \(100,000 of net income.

31 Received Josh’s annual report showing \)620,000 of net income for the year.

31 Taylor’s stock fair value at year-end was \(620,000.

31 Josh’s common stock fair value at year-end was \)14 per share.

Requirements

Prepare Text Source’s partial balance sheet at December 31, 2018, from your answers in Requirement 2.

Accounting for equity investments

Captain Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 200 shares of Velcon stock, paying \(53 per share. The investment represents 4% ownership in Velcon’s voting stock. Captain does not have significant influence over Velcon. Captain intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.28 per share on the Velcon stock.

Dec. 31 Adjusted the Velcon investment to its current market value of $58.

Requirements

Journalize the entries for 2018. Explanations are not required.

What adjustment must be made at the end of the period for trading debt investments and available-for-sale debt investments?
  1. Question: P10-23B Accounting for equity investments

The beginning balance sheet of Text Source Co. included a \(700,000 investment in Taylor stock (20% ownership).

During the year, Text Source completed the following investment transactions:

Mar. 3 Purchased 5,000 shares at \)13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.

May 15 Received a cash dividend of \(0.69 per share on the Josh investment.

Dec. 15 Received a cash dividend of \)100,000 from Taylor investment.

31 Received Taylor’s annual report showing \(100,000 of net income.

31 Received Josh’s annual report showing \)620,000 of net income for the year.

31 Taylor’s stock fair value at year-end was \(620,000.

31 Josh’s common stock fair value at year-end was \)14 per share.

Requirements

Post transactions to T-accounts to determine the December 31, 2018, balances related to the investment and investment income accounts.

Question: S10-5 Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of \(16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was \)19,600. The investment is categorized as a trading debt investment.

Requirements

What was the net effect of the investment on Bell’s net income for the year ended December 31, 2018?
See all solutions

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