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Chapter 13: Q3P (page 658)

(Debt and Equity Investments) Cardinal Paz Corp. carries an account in its general ledger called Investments,which contained debits for investment purchases, and no credits, with the following descriptions.

Feb. 1, 2017 Sharapova Company common stock, \(100 par, 200 shares \) 37,400

April 1 U.S. government bonds, 11%, due April 1, 2027, interest payable

April 1 and October 1, 110 bonds of \(1,000 par each 110,000

July 1 McGrath Company 12% bonds, par \)50,000, dated March 1, 2017,

purchased at 104 plus accrued interest, interest payable

annually on March 1, due March 1, 2037, 54,000

(Round all computations to the nearest dollar.)

(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that the debt securities are classified

as available-for-sale.

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2017, using the

straight-line method.

(c) The fair values of the investments on December 31, 2017, were:

Sharapova Company common stock \( 31,800

U.S. government bonds 124,700

McGrath Company bonds 58,600

What entry or entries, if any, would you recommend be made?

(d) The U.S. government bonds were sold on July 1, 2018, for \)119,200 plus accrued interest. Give the proper entry.

Short Answer

Expert verified

Debt investment debited by $162,000, equity investment debited by $37,400, interest revenue debited by $2,000 and investment credited by $201,4000. Gain on the sale of debt investment is $9,200.

Step by step solution

01

Entry for the purchase of Debt and equity investment

Date

Particulars

Debit

Credit

February 1, 2017

Debt Investment

$162,000

Equity Investment

$37,400

Interest Revenue

$2,000

Investment

$201,400

(To record the investment)

02

Entry for the accrues interest and amortization of premium

Date

Particulars

Debit

Credit

February 1, 2017

Interest Receivables

$8,025

Debt Investment

$51

Interest Revenue

$7,974

(To record accrual interest and amortization of premium)

Notes:

Accrued Interest

$5,000

Less: Amortization of premium

($51)

Accrued Interest

$3,025

Total accrued interest

$7,974

03

Fair value adjustment

Date

Particulars

Debit

Credit

December 31, 2017

Fair value adjustment

$13,700

Unrealized holding income

$13,700

(Being adjustment of securities)

04

Entry for the sale of investment

Date

Particulars

Debit

Credit

July 1, 2018

Cash

$124,700

Interest Revenue

$5,500

Gain on sale of investment

$9,200

Debt investment

$110,000

(Being entry for the sale of investment)

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Most popular questions from this chapter

Question: The presentation of current and non-current liabilities in the statement of financial position (balance sheet):

  1. is shown only on GAAP financial statements.
  2. is shown on both a GAAP and an IFRS statement of financial position.
  3. is always shown with current liabilities reported first in an IFRS statement of financial position.

(d)includes contingent liabilities under IFRS.

Under what conditions is an employer required to accrue a lability for sick pay? Under what conditions is an employer permitted but not required to accrue a liability for sick pay?

Define (a) a contingency and (b) a contingent liability.

Question: (Lessee-Lessor Entries, Operating Lease) Cleveland Inc. leased a new crane to Abriendo Construction under a 5-year noncancelable contract starting January 1, 2017. Terms of the lease require payments of \(33,000 each January 1, starting January 1, 2017. Cleveland will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of \)240,000, and a cost to Cleveland of \(240,000. The estimated fair value of the crane is expected to be \)45,000 at the end of the lease term. No bargain-purchase or -renewal options are included in the contract. Both Cleveland and Abriendo adjust and close books annually at December 31. Collectibility of the lease payments is reasonably certain, and no uncertainties exist relative to unreimbursable lessor costs. Abriendo’s incremental borrowing rate is 10%, and Cleveland’s implicit interest rate of 9% is known to Abriendo.

Instructions

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Journal Entries for Fair Value and Equity Methods) The following are two independent situations.

Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of \(13 per

share on March 18, 2017. On June 30, Martinez declared and paid \)75,000 cash dividends to all stockholders. On December 31,

Martinez reported net income of \(122,000 for the year. At December 31, the market price of Martinez Fashion was \)15 per share.

Situation 2: Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 30,000 outstanding shares

of common stock at a total cost of \(9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of \)36,000

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Instructions

Prepare all necessary journal entries in 2017 for both situations.
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