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Chapter 10: Q. 5SE_2 (page 568)

Question: S10-5 Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of 16,800bypurchasingaGrant,Inc.bondatfacevalue.Atyear−end,December31,2018,thefairvalueoftheGrantbondwas19,600. The investment is categorized as a trading debt investment.

Requirements

2. In what category and at what value would Bell report the asset on the December 31, 2018, balance sheet? In what account would the market price change in Grant’s bond be reported, if at all?

Short Answer

Expert verified

Trading debt investment on the asset side: $19,600.

Net income (Other comprehensive income):$2,800.

Step by step solution

01

Definition of Other Comprehensive Income

The income that includes the gains and losses that are not realized and occurred to the increase or decrease in the fair value of the asset held is known asother comprehensive income.

02

Reporting Asset and its Fair Market Value

The business entity will report bonds of $19,600 on the asset side of the balance sheet as Trading debt investment. The unrealized holding gains of $2,800 will be included in thenet income of the business entity.

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Most popular questions from this chapter

Question: Wild Adventure conducts tours of wildlife reserves around the world. The company recently purchased a lodge in Adelaide, Australia, securing a 4% mortgage from First Bank. In addition to monthly payments, Wild Adventure must provide annual reports to the bank showing that the company has a current ratio of 1.2 or better. After reviewing the annual reports, the CEO, N. O. Scrooge, approached Carl Hauptfleisch, the CFO, and stated, “We’ve decided we are going to move all our long-term debt investments into our brokerage account so we can sell them soon. Carl, go ahead and make the adjusting entries as of the current year-end.” Carl made the adjustments even though he doesn’t think the company will actually go ahead with the planned sale of the long-term debt investments. The subsequent year, the economy turned, and the company’s travel revenues dropped more than 60%. Wild Adventure eventually defaulted on the First Bank loan.

Requirements

1. What effect did the adjustments have on the financial statements? What effect did the adjustments have on the current ratio?

Identifying why companies invest and classifying investments

Garden Haven has excess cash of $15,000 at the end of the harvesting season. Garden Haven will need this cash in four months for normal operations.

Requirements

What type of classification would Garden Haven’s investment fall within—short-term or long-term? Why?

Accounting for debt investments

Suppose Solomon Brothers purchases $500,000 of 6% annual bonds of Morin 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. Solomon intends to hold the Morin bond investment until maturity.

Requirements

1. Journalize Solomon Brothers’ transactions related to the bonds for 2018.

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 16pershare.OnAugust1,2018,Farrierpaida0.70 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?

Accounting for debt investments

Suppose Solomon Brothers purchases $500,000 of 6% annual bonds of Morin 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. Solomon intends to hold the Morin bond investment until maturity.

Requirements

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