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Chapter 10: Q. 6SE_3 (page 568)

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

What was the net effect of the investment on Josh’s net income for the year ended December 31, 2018?

Short Answer

Expert verified

Unrealized holding loss of available for sale securities will not affect the business’s net income.

Step by step solution

01

Definition of Available for Sale Investment

The investments purchased for generating gain over a short period within one year are known to be available for sale investment. These investments are held for more time as compared totrading investments.

02

Effect of investment on net income

Net income will not be affected by the unrealized holding loss because such loss will be reported as a deductible item on the balance sheet under the stockholder equity section as other comprehensive income. Such loss will beadjusted against the retained earnings in the equity section.

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Most popular questions from this chapter

As a result of the recent mortgage crisis, many banks reported record losses to their mortgage receivables and other assets based on the decline in these assets’ fair values.

Requirements

If a business chooses not to report these losses, is there an ethical issue involved? Who is hurt?

How is the purchase of a held-to-maturity debt security at face value recorded?

Question: Wild Adventure conducts tours of wildlife reserves around the world. The company recently purchased a lodge in Adelaide, Australia, securing a 4% mortgage from First Bank. In addition to monthly payments, Wild Adventure must provide annual reports to the bank showing that the company has a current ratio of 1.2 or better. After reviewing the annual reports, the CEO, N. O. Scrooge, approached Carl Hauptfleisch, the CFO, and stated, “We’ve decided we are going to move all our long-term debt investments into our brokerage account so we can sell them soon. Carl, go ahead and make the adjusting entries as of the current year-end.” Carl made the adjustments even though he doesn’t think the company will actually go ahead with the planned sale of the long-term debt investments. The subsequent year, the economy turned, and the company’s travel revenues dropped more than 60%. Wild Adventure eventually defaulted on the First Bank loan.

Requirements

Has a fraud occurred? If so, what is the fraud?

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.

Why would a company invest in debt or equity securities?
See all solutions

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