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Chapter 10: Q.9RQ (page 566)
What adjustment must be made at the end of the period for trading debt investments and available-for-sale debt investments?
Answer
Adjustments for fair value are made at the year-end.
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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.
In 150 words or fewer, explain the difference between trading debt investments and available-for-sale debt investments.
Where on the financial statements is an unrealized holding gain or loss on available-for-sale debt investments reported?
Question: S10-4 Accounting for equity investments
On January 1, 2018, Bryant, Inc. decides to invest in 3,750 shares of Farrier stock when the stock is selling for \(16 per share. On August 1, 2018, Farrier paid a \)0.70 per share cash dividend to stockholders. On December 31, 2018, Farrier reports net income of $50,000 for 2018. Assume Farrier has 15,000 shares of voting stock outstanding during 2018 and Bryant has significant influence over Farrier.
Requirements
3. In what category and value would Bryant report the investment on the December 31, 2018, balance sheet?
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?
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