$8\mathrm{.}3$ Debt and Equity Investments

Company Sigma purchases the following debt and equity securities at the start of year X$2$:

$-20,000$ ordinary shares in company D for a total value of $500,000.$ Sigma classifies

these shares in D as a non$-$trading investment.

$-10,000$ ordinary shares in company T for a total value of $340,000.$ Sigma classifies

these shares in T as a trading investment.

$-1,00010\%$ non$-$cumulative preference shares in TR for a total value of $80,000.$ These

preference shares are not quoted, and so the market value cannot be determined reliably.

These are classified as non$-$trading investments.

$-6\%$ bonds of company C with a maturity of $4$ years for a total value of $356,134.$

Company Sigma measures these bonds at amortized cost. The face value of the bond is

$350,000.$ The interest is paid annually. The effective interest rate at the date of

purchase was $5\mathrm{.}5\%.$

$-$ A $5\%$ zero$-$coupon bond with a face value of $100,000$ and remaining life of $10$ years.

However, it is expected that the firm will only pay $90,000$ at the end of the bond$$s life

leading to a total value of $55,252.$ Company Sigma measures these bonds at amortized

cost$.$

During X$2$ the following events take place:

$-$ At the end of X$2,$ the market value of the shares in D is $380,000.$

$-$ At the end of X$2,$ the market value of the shares in T is $350,000.$

$-$ At the end of X$2,$ Sigma expects only to receive $80,000$ at the end of the bond$$s life.

The new market rate is $5\mathrm{.}5\%.$ Sigma deems the bond to be impaired.

During year X$3,$ the following events take place:

$-$ In May of year X$3,$ company Sigma sells half of its shares in T for $177,500.$ At the

end of year X$3,$ the market value of the remaining shares in T is $33$ per share.

$-$ In year X$3,$ company TR pays a dividend of $8$ per share on its preference shares. $($The

preference dividend is not cumulative$).$ At the end of year X$3,$ management, using cash$-$

flow$-$based valuation techniques, values the investment in TR at $100,000.$

$-$ At the end of year X$3,$ the management of company Sigma intends to sell the bonds of

Company C in a short period of time and therefore decides to apply the fair value method

to the bonds. At the end of year X$3,$ the fair value of the bonds is $363,200,$ and they

are classified as a trading investment.

$-$ At the end of X$3,$ Sigma sells its investment in company D for $250,000.$

Required:

Ignoring taxes, use journal entries to account for the following events:

$1.$ The purchase of the investments at the start of year X$2.$

$2.$ The accrual and receipt of interest $($on the bonds$)$ for the year X$2.$

$3.$ The fair value adjustments at the end of year X$2.$

$4.$ The impairment of the zero$-$coupon bond at the end of X$2.$

$5.$ The accrual and receipt of interest $($on the bonds$)$ for the year X$3.$

$6.$ The receipt of dividends $($on company TR$$s preference shares$)$ in year X$3.$

$7.$ The sale of shares in company T in May, X$3.$

$8.$ The fair value accounting of the investment in company TR in year X$3.$

$9.$ The classification of bonds in company C as trading investments at the end of year X$3.$

$10.$ The fair value adjustments of other investments at the end of year X$3.$

$11.$ The sale of the investment in company D at the end of year X$3.$