Question
he following information pertains to Lynx Corporation's portfolio of marketable securities for the years ended December 31, Year 1, and December 31, Year 2: Cost
he following information pertains to Lynx Corporation's portfolio of marketable securities for the years ended December 31, Year 1, and December 31, Year 2:
Cost Fair Value Activity Year 2 Fair Value (12/31/year 2)
Fair Value
Cost (12/31/year1) Activity Year 2 (12/31/year2)
Held-to-Maturity Debt Securities
Bond A $90,000 $92,000 Received $3,000 $93,500
interest
Available-for-sale Debt securities
Bond B $100,000 $101,750 sold at $103,000 $102,100
Marketable Equity Securities
(Lacks significant impact)
Stock C $75,000 $68,000 $73,000
Stock D $45,000 $51,000 sold at $49,500 $53,500
Additional Notes (1): Bond A is an 8 - year bond paying 3% annually; face value $100,000, issued at a market yield of 4.5%. It was bought on 1/1/year 1.
Additional Notes (2): Bond B is a 10-year bond paying 3.5% and was purchased at face value ($100,000). It was sold on 1/2/year 2. The interest accrued in year 2 is immaterial.
1.) Compute the carrying value of each security on the company's balance sheet for year 1:
Bond A:
Held to Maturity Debt Securities is shown on the balance sheet at the amortized acquisition cost and all changes to the market has to be ignored. Hence Fair Value has to be ignored.
Bond A to be classified as long term investment as it is 8 year bond
Treatment : The carrying value to be reported for balance sheet year 1 is 93,000
Cost - $90,000
Add: $3,000 (Accrued Interest)
Accrued income of $3000, has to be booked as Earned Income in Income statement
Bond B:
Available for Sale Debt Securities are reported at Fair Value and unrealized gains and losses to be shown separately as accumulated other income within the Equity section of balance sheet and not to be get added to fair value.
Bond B to be classified as long term investment.as it is 10 year bond
Hence carrying value to be reported at Balance sheet at year 1 = $101,750
Stock C:
Marketable Equity securities are reported at lower of cost or market value.
Stock C to be classified as current asset as it is high liquid investment
In this Fair Value is less than the cost, hence to be reported at $68,000
Stock D:
In this cost is less than the market value and hence the carrying value reported at balance sheet as $45,000
Stock D to be classified as current asset as it is high liquid investment
Report the carrying value for each security on the company's balance sheet for year 2:
Bond A: $93,000 ($90,000 + $3,000 accrued interest)
Bond B: (this should be empty according to teacher)
Stock C: $73,000 [since you have to use the lower of Cost or Fair Value. Cost of $75K > Fair Value (12/31/Year 2) of $73k].
Stock D: (this should be empty according to teacher)
Required: Please provide the journal entries for each security for activity in Year 2
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