Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh’s Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit’s bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term.

Requirements

In what category and at what value would Josh report the asset on the December 31, 2018, balance sheet? In what account would the market price change in Jackrabbit’s stock be reported, if at all?

Short Answer

Expert verified

Bonds investment on the asset side at $51,200.

Other comprehensive income:$3,200.

Step by step solution

01

Definition of Fair Value

Fair value can be defined as thevalue assigned to any goods or service, considering the demand, supply, and competitive factors. Such value is different from that of market value.

02

Reporting investment on the balance sheet

The investment made in the bonds will be reported on the asset side as available for sale securities. It will be reported as equal to $51,200.

The loss occurring due to a decrease in the value of the bond will be reported in theother comprehensive income and will be adjusted against the net income.

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Most popular questions from this chapter

How are held-to-maturity debt investments reported on the financial statements?

Why would a company invest in debt or equity securities?

Accounting for debt investments

League Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $900,000 of CocoCorp bonds at face value on January 2, 2018. The CocoCorp bonds pay interest at the annual rate of 8% on June 30 and December 31 and mature on December 31, 2022. League Up intends to hold the investment until maturity.

Requirements

1. How would the bond investment be classified on League Up’s December 31, 2018, balance sheet?

Accounting for debt investments

Suppose Solomon Brothers purchases $500,000 of 6% annual bonds of Morin Corporation at face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2022. Solomon intends to hold the Morin bond investment until maturity.

Requirements

Journalize the entry required on the Morin bonds maturity date. (Assume the last interest payment has already been recorded.)

Question: E10-11 Accounting for debt investments

Peyton Investments completed the following investment transactions during 2018:

2018

Jan. 5 Purchased Vedder Company’s \(400,000 bond at face value. Peyton classified the investment as available-for-sale. The Vedder bond pays interest at the annual rate of 4% on June 30 and December 31 and matures on December 31, 2021. Management’s intent is to keep the bonds for several years.

Jun. 30 Received an interest payment from Vedder.

Dec. 31 Received an interest payment from Vedder.

31 Adjusted the investment to its current market value of \)396,000

Requirements

2. Prepare a partial balance sheet for Peyton’s Vedder investment as of December 31, 2018.

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