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Chapter 10: Q11E_3 (page 569)

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

Prepare a comprehensive income statement for Peyton Investments for year ended December 31, 2018. Assume net income was $200,000.

Short Answer

Expert verified

Comprehensive income totals$212,000.

Step by step solution

01

Definition of Long-Term Investment

The investment purchased for holding themover a long period of more than one year is known as a long-term investment.

02

Comprehensive income statement

Particular

Amount $

Net income

$200,000

Add/Less: Other Income and expenses

Unrealized holding loss – available for sale debt investment

($4,000)

Interest revenue

16,000

Comprehensive income

$212,000

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Most popular questions from this chapter

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

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

Question: P10-25 Accounting for debt and equity investments

This problem continues the Canyon Canoe Company situation from Chapter 9. Amber and Zack Wilson are pleased with the growth of their business and have decided to invest its temporary excess cash in a brokerage account. The company had the following securities transactions in 2019.

Jul. 1 Purchased 8,000 shares in Adobe Outdoor Adventure Company for \(3 per share. Canyon Canoe does not have significant influence over Adobe.

7 Purchased 35% of the stock of Bison Backpacks consisting of 43,750 shares of stock (out of a total of 125,000 shares) for \)5 per share. Canyon Canoe does have significant influence over Bison.

10 Purchased a bond from Camelot Canoes with a face value of \(80,000. Canyon Canoe intends to hold the bond to maturity. The bond pays interest semiannually on June 30 and December 31.

Sep. 30 Received dividends of \)0.15 per share from Adobe.

Nov. 1 Received dividends of \(0.30 per share from Bison.

Dec. 31 Received an interest payment of \)3,200 from Camelot Canoes.

31 Bison Backpacks reported net income of \(30,000 for the year.

31 Adjusted the Adobe stock for a market value of \)2.98 per share.

Requirements

Determine the effect on Canyon Canoe Company’s net income for the year for each of the three investments.

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?

Question: E10-9 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

3. How much interest revenue will Advance report during 2018 on this bond investment?

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon.

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment.

Sep. 16 Sold the Naradon stock for \(13.70 per share.

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term.

Dec. 31 Received a \(600 interest payment from Purple.

31 Adjusted the Purple bond to its market value of \)44,000.

Requirements

3. Prepare T-accounts for the investment assets, and show how to report the investments on Captain Transfer’s balance sheet at December 31, 2018.

See all solutions

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