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Chapter 12: 5BE (page 610)

Hendricks Corporation purchased trading investment bonds for \(50,000 at par. On December 31, Hendricks received an annual interest of \)2,000, and the fair value of the bonds was $47,400. Prepare Hendricks’ journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

Short Answer

Expert verified
  1. The amount debited to debt investment is $50,000.
  2. The amount of rent received is $2,000.
  3. The unrealized holding income is $2,600.

Step by step solution

01

Definition of the fair value adjustment

It is the process in which the book value and purchase price are adjusted.

02

Journal entry of the purchase of the investment

Date

Description

Debit

Credit

A.

Debt Investment

$50,000

Cash

$50,000

Being entry to record the purchase of bonds

03

Journal entry for the interest received

Date

Description

Debit

Credit

B

Cash

$2,000

Interest Revenue

$2,000

Being entry of rent received

04

Adjustment entry for the fair value

Date

Description

Debit

Credit

C

Unrealized holding loss- Income

$2,600

Fair value adjustment

$2,600

Being year-end adjustment entry of fair value

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Most popular questions from this chapter

Presented below is selected information related to Martin Burke Inc. at year-end. All these accounts have debit balances.

Cable television franchises

Film contract rights

Music copyrights

Customer lists

Research and development costs

Prepaid expenses

Goodwill

Covenants not to compete

Cash

Brand names

Discount on notes payable

Notes receivable

Accounts receivable

Investments in affiliated companies

Property, plant, and equipment

Organization costs

Internet domain name

Land

Instructions:

Identify which items should be classified as an intangible asset. For those items not classified as an intangible asset, indicate where they would be reported in the financial statements.

Franklin Corp. has a debt investment that it has held for several years. When it purchased the debt investment, Franklin classified and accounted for it as an available-for-sale. Can Franklin use the fair value option for this investment? Explain.

What is the purpose of a cash flow hedge?

Stave Company invests \(10,000,000 in 5% fixed rate corporate bonds on January 1, 2017. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now \)10,600,000. Interest is paid on January 1. Prepare journal entries for Stave Company to (a) record the transactions related to these bonds in 2017, assuming Stave does not elect the fair option; and (b) record the transactions related to these bonds in 2017, assuming that Stave Company elects the fair value option to account for these bond.

In what situation will the unrealized holding gain or loss on inventory be reported in income?
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