3 5 P17-3 (Debt and Equity Investments) Cardinal Paz Corp. carries an account in
ID: 2602792 • Letter: 3
Question
3 5 P17-3 (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 $37,400 Sharapova Company ordinary shares, $100 par, 200 shares Government bonds, 11%, due April 1, 2025, interest payable April 1 and October 1, 110 bonds of $1,000 par each McGrath Company 12% bonds, par $50,000, dated March 1, 2015 purchased at 104, plus accrued interest payable annually on March 1, due March 1, 2035 Feb. 1, 2015 April 1 110,000 July 1 54,000 Instructions (Round all computations to the nearest dollar) Prepare entries necessary to classify the amounts into proper accounts, assuming that Paz plans to actively manage these investments. (a) (b) Prepare the entry to record the accrued interest on December 31, 2015. (c) The fair values of the investments on December 31, 2015, were: Sharapova Company shares Government bonds McGrath Company bonds $31,800 124,700 58,600 What entry or entries, if any, would you recommend be made? (d) The government bonds were sold on July 1, 2016, for $119,200 plus accrued interest. Give the proper entryExplanation / Answer
(a) Debt Investments..................................................... 162,000*
Equity Investments.................................................. 37,400
Interest Revenue ($50,000 X .12 X 4/12)............... 2,000
Investments....................................................... 201,400
*[$110,000 + ($50,000 X 1.04)]
(b) December 31, 2015
Interest Receivable.................................................. 8,025
Debt Investments............................................. 51
Interest Revenue.............................................. 7,974
[Accrued interest
[ $50,000 X .12 X 10/12 = $5,000
[Premium amortization
[ 6/236 X $2,000 = (51)
[Accrued interest
[ $110,000 X .11 X 3/12 = 3,025
$7,974 ]
(c) December 31, 2015
Actively Managed Portfolio
Securities
Cost
Fair Value
Unrealized Gain (Loss)
Sharapova Company stock
$ 37,400
$ 31,800
$ (5,600)
U.S. government bonds
110,000
124,700
14,700
McGrath Company bonds
51,949*
58,600
6,651
Total
$199,349
$215,100
15,751
Previous fair value adjustment balance
0
Fair value adjustment—Dr.
$15,751
*($50,000 X 1.04) – $51
Fair Value Adjustment........................................... 15,751
Unrealized Holding Gain or Loss—Equity. 15,751
(d) July 1, 2016
Cash ($119,200 + $3,025).......................................... 122,225
Debt Investments............................................................. 110,000
Interest Revenue ($110,000 X .11 X 3/12).................... 3,025
Gain on Sale of Investments.......................................... 9,200
Note:So 50,000 x 1.04 = 52000 since bonds are purchased at 104% of par value. and balance 2000 is accrued interest which becomes 52000+2000 = 54000 as given.
Securities
Cost
Fair Value
Unrealized Gain (Loss)
Sharapova Company stock
$ 37,400
$ 31,800
$ (5,600)
U.S. government bonds
110,000
124,700
14,700
McGrath Company bonds
51,949*
58,600
6,651
Total
$199,349
$215,100
15,751
Previous fair value adjustment balance
0
Fair value adjustment—Dr.
$15,751
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