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Chapter 10: Q.10-21PGB_1 (page 573)

Question: P10-21B Accounting for debt investments

Suppose Hale and Sons purchases $800,000 of 3.5% annual bonds of Tyson Way 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. Hale and Sons intends to hold the Tyson Way bond investment until maturity.

Requirements

1. Journalize Hale and Sons’s transactions related to the bonds for 2018.

Short Answer

Expert verified

Answer

Both sides of the journal totals$828,000.

Step by step solution

01

Definition of Principal Amount

The actual amount of money transferred to the borrower by the lender is known as the principal amount. The interest is charged on this amount only.

02

Journal Entries for the Transaction

Date

Accounts and Explanation

Debit $

Credit $

Jan 1, 2018

Held to maturity – debt investment

$800,000

Cash

$800,000

June 30, 2018

Cash

$14,000

Interest revenue

$14,000

Dec 31, a2018

Cash

$14,000

Interest revenue

$14,000

$828,000

$828,000

Calculation of Interest revenue:

interestrevenue=principal×interestrate×612=$800,000×3.5%612=$14,000

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Most popular questions from this chapter

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

How much cash interest will Advance receive each year from FermaCo?

What does the rate of return on total assets measure, and how is it calculated?

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

2. Journalize the following on League Up’s books:

a. Receipt of final interest payment on December 31, 2022.

b. Disposition of the investment at maturity on December 31, 2022

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 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.

See all solutions

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