ems: Series B PR 15-1B Debt investment transactions, available-for-sale valuatio
ID: 2559251 • Letter: E
Question
ems: Series B PR 15-1B Debt investment transactions, available-for-sale valuation Rekva Mart Inc. is a general merchandise retail company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Rekya Mart Inc., which has a fiscal year ending on December 31: Year 1 OBJ. 2, 4 1, Purchased $90,000 of smoke Bay 6%, 10-year bonds at their face amount plus Apr accrued interest of $900. The bonds pay interest semiannually on February 1 and August 1 May 16. Purchased $42,000 of Geotherma Co. 4%, 12-year bonds at their face amount plus accrued interest of $70. The bonds pay interest semiannually on May 1 and November 1. Aug. 1. Received semiannual interest on the Smoke Bay bonds. Sept. 1. Sold $12,000 of Smoke Bay bonds at 101 plus accrued interest of $60. Nov. 1. Received semiannual interest on the Geotherma Co. bonds. Dec. 31. Accrued $1,950 interest on the Smoke Bay bonds. 31. Accrued $280 interest on the Geotherma Co. bonds. Year 2 Feb. 1. Received semiannual interest on the Smoke Bay bonds. May 1. Received semiannual interest on the Geotherma Co. bonds. Instructions 1. Journalize the entries to record these transactions. 2. If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure?Explanation / Answer
1.
2. If the bonds are classified as available-for-sale securities, then the portfolio of bonds would need to be revalued. This would be accomplished by using a valuation allowance account and an unrealized gain (loss) account as part of stockholders' equity. If the fair value were higher than the cost of the bond portfolio, the two accounts would be positive and thus, added to investments and stockholders' equity, respectively. If the fair values were lower than the cost of the bonds portfolio, the two accounts would be negative and, thus subtracted from investments and stockholders' equity respectively.
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Date Account Titles and Explanation Debit Credit Year 1 Apr. 1 Investment in bonds-Smoke Bay 90000 Interest receivable 900 Cash 90900 (To record purchase of bonds) May. 16 Investment in bonds-Geotherma Co. 42000 Interest receivable 70 Cash 42070 (To record purchase of bonds) Aug. 1 Cash ($90000 x 6% x 6/12) 2700 Interest receivable 900 Interest revenue ($90000 x 6% x 4/12) 1800 (To record interest received on bonds) Sep. 1 Interest receivable 60 Interest revenue ($12000 x 6% x 1/12) 60 (To record accrued interest) Sep. 1 Cash ($12000 x 101/100) 12120 Investment in bonds-Smoke Bay 12000 Interest receivable 60 Gain on sale of investment 60 (To record sale of investment in bonds) Nov. 1 Cash ($42000 x 4% x 6/12) 840 Interest receivable 70 Interest revenue ($42000 x 4% x 5.5/12) 770 (To record interest received on bonds) Dec. 31 Interest receivable 1950 Interest revenue 1950 (To record accrued interest) Dec. 31 Interest receivable 280 Interest revenue 280 (To record accrued interest) Year 2 Feb. 1 Cash ($78000 x 6% x 6/12) 2340 Interest receivable 1950 Interest revenue ($78000 x 6% x 1/12) 390 (To record interest received on bonds) May. 1 Cash ($42000 x 4% x 6/12) 840 Interest receivable 280 Interest revenue ($42000 x 4% x 4/12) 560 (To record interest received on bonds)Related Questions
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