United Intergroup, Inc. held two securities of other companies as investments. U
ID: 2487561 • Letter: U
Question
United Intergroup, Inc. held two securities of other companies as investments. United's fiscal year-end is December 31. The following events during 2011 pertain to the investment portfolio.
Purchase Investments
July 1, 2011 - Purchased Masterwear Industries bonds face value of $500,000, 125 interest, dated July 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in three years. The market yield (effective interest rate) for bonds of similar risk and maturity is 14%. This bond is held to maturity (HTM).
Purchased 10% of Arjent, Inc. common stock by $1,00,000. The stock is available for sale (AFS).
Receive Investment Revenue
December 31, 2011 - Received a semi-annual cash interest payment from Masterwear
Adjust Investments to Fair Value
December 31, 2011 - Valued the Arjent stock at $1,040,000.
Sell Investments
January 15, 2012 - Sold the Argent sock for $996,000.
Required:
(1) Prepare the journal entry on July 1, 2011 for the purchase of the bond of Masterwear
(2) Prepare the journal entry on July 1, 2011 for the purchase of the common stock of Arjent.
(3) Prepare the journal entry on December 31, 2011 for receiving of cash interest payment from Masterwear.
(4) Prepare the journal entry on December 31, 2011 for adjusting Arjent's stock to fair value
(5) Prepare the journal entry on January 15, 2012 for selling the Arjent stock.
Explanation / Answer
1. Purchase of Masterwear bond:
Annual interest revenue = $ 500,000 x 12.5% = $ 62,500
Semi-annual interest receipt = $ 31,250
Purchase price of bonds = Semi-annual interest x PVIFAi=7%, n=6 + Maturity amount x PVIFi=7%, n=6 = $ 31,250 x 4.7665 + $ 500,000 x 0.6663 = $ 482,103
2. Purchase of common stock of Argent:
3. Cash interest receipt:
4. Adjustment of Arjent's stock to fair value:
5. Selling the Argent stock:
Date Account Titles Debit Credit $ $ July 1, 2011 Investment in bonds receivable 500,000 Discount on bonds receivable 17,897 Cash 482,103Related Questions
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