Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jan 28, 2024

On January 1, 2019, Kelly Corporation acquired bonds with a face value of $400,000 for $387,580.27, a price that yields a 12% effective annual interest

On January 1, 2019, Kelly Corporation acquired bonds with a face value of $400,000 for $387,580.27, a price that yields a 12% effective annual interest rate. The bonds carry a 11% stated rate of interest, pay interest semiannually on June 30 and December 31, are due December 31, 2022, and are being held to maturity

Required:

Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the:

1.	straight-line method of amortization
2.	effective interest method of amortization

Chart of Accounts

CHART OF ACCOUNTS

Kelly Corporation

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
189	Accumulated Depreciation
191	Investment in Held-to-Maturity Debt Securities

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue
431	Interest Income

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

General Journal

1. Prepare journal entries to record the purchase of the bonds on January 1 and the first two interest receipts on June 30 and December 31 using the straight-line method of amortization.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8

2. Prepare journal entries to record the purchase of the bonds on January 1 and the first two interest receipts on June 30 and December 31 using the effective interest method of amortization.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8

Q2. On March 31, 2019, Brodie Corporation acquired bonds with a par value of $300,000 for $319,800. The bonds are due December 31, 2024, carry a 8% annual interest rate, pay interest on June 30 and December 31, and are being held to maturity. The accrued interest is included in the acquisition price of the bonds. Brodie uses straight-line amortization.

Required:

1.	Prepare journal entries for Brodie to record the purchase of the bonds and the first two interest receipts.
2.	Next LevelIf Brodie failed to separately record the interest at acquisition, explain the errors that would occur in the company's financial statements (no calculations are required).

Chart of Accounts

CHART OF ACCOUNTS

Brodie Corporation

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
189	Accumulated Depreciation
191	Investment in Held-to-Maturity Debt Securities

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue
431	Interest Income

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

General Journal

1. Prepare journal entries for Brodie to record the purchase of the bonds on March 31 and the first two interest receipts on June 30 and December 31.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9

Q3. On November 1, 2018, Reid Corporation acquired bonds with a face value of $500,000 for $481,156.15. The bonds carry a stated rate of interest of 10%, were purchased to yield 11%, pay interest semiannually on April 30 and October 31, were purchased to be held to maturity, and are due October 31, 2022. On November 1, 2019, in contemplation of a major acquisition, the bonds were sold for $500,000. Reid is on a fiscal year accounting period ending October 31 and uses the effective interest method.

Required:

Prepare journal entries to record the purchase of the bonds, the interest receipts on April 30, 2019, and October 31, 2019, and the sale of the bonds.

Chart of Accounts

CHART OF ACCOUNTS

Reid Corporation

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
137	Interest Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
189	Accumulated Depreciation
191	Investment in Held-to-Maturity Debt Securities

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue
431	Interest Income
434	Gain on Sale of Debt Securities

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
599	Loss on Sale of Debt Securities
910	Income Tax Expense

General Journal

Prepare journal entries to record the purchase of the bonds, the interest receipts on April 30, 2019, and October 31, 2019, and the sale of the bonds.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10
11

Q4. On January 1, 2019, Rodgers Company purchased $400,000 face value, 10%, 3-year bonds for $390,009.00, a price that yields a 11% effective annual interest rate. The bonds pay interest semiannually on June 30 and December 31.

Required:

1.	Record the purchase of the bonds.
2.	Prepare an investment interest income and discount amortization schedule using the effective interest method.
3.	Record the receipts of interest on June 30, 2019, and June 30, 2021.

Chart of Accounts

CHART OF ACCOUNTS

Rodgers Company

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
189	Accumulated Depreciation
191	Investment in Held-to-Maturity Debt Securities

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue
431	Interest Income
434	Gain on Sale of Investment

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
599	Loss on Sale of Investment
910	Income Tax Expense

General Journal

1. Record the purchase of the bonds on January 1, 2019.

General Journal Instructions

PAGE 2019

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

3. Record the receipts of interest on June 30, 2019, and June 30, 2021.

General Journal Instructions

PAGE 2019PAGE 2021

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3

Analysis

2. Prepare an investment interest income and discount amortization schedule using the effective interest method.

Additional Instruction

RODGERS COMPANY

Bond Investment Interest Income and Discount Amortization Schedule

Effective Interest Method

1	Date	Cash Debit	Interest Income Credit	Investment in Debt Securities Debit	Carrying Value of Debt Securities
2	01/01/19
3	06/30/19
4	12/31/19
5	06/30/20
6	12/31/20
7	06/30/21
8	12/31/22

Q5. At the end of 2018, Hodge Company prepared the following schedule of investments in trading debt securities (all of which were acquired at par value):

Company	12/31/2018 Book Value	12/31/2018 Fair Value
Thompson Company	$75,000	$74,200
Stevens Company	40,000	43,100
Totals	$115,000	$117,300

During 2019, the following transactions occurred:

July 1	Purchased Little Company debt securities for $100,000 (which is equal to par value). The securities carry an annual interest rate of 10%, mature on December 31, 2021, and pay interest seminannually on July 1 and December 31.
Oct. 11	Sold all of the Thompson Company securities for $73,000 plus interest of $2,800.
Dec. 31	Received interest of $5,000 on the Stevens Company and Little Company debt securities, and the following yearend total market values were available: Stevens Company debt securities, $45,000; Little Company debt securities, $98,000.

Required:

1.	Prepare journal entries to record the preceding information.
2.	Next LevelIf Terry uses IFRS, how would the accounting for investments be different from U.S. GAAP?

Chart of Accounts

CHART OF ACCOUNTS

Hodge Company

General Ledger

	ASSETS
111	Cash
113	Investment in Trading Securities
114	Investment in Available-for-Sale Securities
119	Allowance for Change in Fair Value of Investment
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
189	Accumulated Depreciation
191	Investment in Held-to-Maturity Debt Securities

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings
390	Unrealized Holding Gain/Loss: Trading Securities
391	Unrealized Holding Gain/Loss: Available-for-Sale Securities

	REVENUE
411	Sales Revenue
431	Interest Income
441	Gain on Sale of Trading Securities

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
895	Loss on Sale of Trading Securities
910	Income Tax Expense

General Journal

1. Prepare journal entries to the transactions.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10

Q6. On December 31, 2018, Marsh Company held Xenon Company bonds in its portfolio of available-for-sale securities. The bonds have a par value of $15,000, carry a 10% annual interest rate, mature in 2025, and had originally been purchased at par. The market value of the bonds at December 31, 2018 was $13,000. The December 31, 2018, balance sheet showed the following:

Marsh Company

Partial Balance Sheet

December 31, 2018

1	Assets
2	Investment in Available-for-Sale Securities	$15,000.00
3	Less: Allowance for Change in Fair Value of Investment	(2,000.00)
4		$13,000.00
5	Shareholders' Equity:
6	Unrealized Holding Gain/Loss	$(2,000.00)

On January 1, 2019, Marsh acquired bonds of Yellow Company with a par value of $16,000 for $16,200. The Yellow Company bonds carry an annual interest rate of 12% and mature on December 31, 2023. Additionally, Marsh acquired Zebra Company bonds with a face value of 18,000 for $17,600. The Zebra Company bonds carry an 8% annual interest rate and mature on December 31, 2028. At the end of 2019, the respective market values of the bonds were: Xenon, $14,000; Yellow, $18,000; and Zebra, $20,000. Marsh classifies all of the debt securities as available-for-sale as it does not intend to hold them to maturity nor does it intend to actively buy and sell them. Assume that Marsh uses the straight-line method to amortize any discounts or premiums.

Required:

1.	Prepare the journal entries necessary to record the purchase of the investments on January 1, 2019, the annual interest payments on December 31, 2019, and the adjusting entry needed on December 31, 2019.
2.	What would Marsh disclose on its December 31, 2019, balance sheet related to these investments?

Chart of Accounts

CHART OF ACCOUNTS

Marsh Company

General Ledger

	ASSETS
111	Cash
114	Investment in Available-for-Sale Securities
119	Allowance for Change in Fair Value of Investment
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
189	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings
339	Unrealized Holding Gain/Loss: Available-for-Sale Securities

	REVENUE
411	Sales Revenue
431	Interest Income

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

General Journal

1. Prepare the journal entries necessary to record the purchase of the investments in 2019, the annual interest payments on December 31, 2019.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10
11
12
13		Adjusting Entries
14
15

Balance Sheet

2. What would Marsh disclose on its December 31, 2019, balance sheet related to these investments?

Balance Sheet Instructions

Marsh Company

Partial Balance Sheet

December 31, 2019

1	Assets:
2
3
4
5	Shareholders' Equity:
6

Q7.At the beginning of 2019, Ace Company had the following portfolio of investments in available-for-sale debt securities (all of which were acquired at par value):

Security	Cost	1/1/19 Fair Value
A	$35,000	$44,000
B	53,000	50,000
Totals	$88,000	$94,000

During 2019, the following transactions occurred:

Transactions:
May	3	Purchased C debt securities at their par value for $50,000.
July	1	Sold all of the A securities for $44,000 plus interest of $1,000.
Dec.	31	Received interest of $1,000 on the B and C securities. Additionally the following information was available:

Security	12/31/19 Fair Value
B	$58,000
C	53,000

Required:

1.	Prepare journal entries to record the preceding information.
2.	What is the balance in the Unrealized Holding Gain/Loss account on December 31, 2019?
3.	Next LevelWhat justification does the FASB give for its treatment of unrealized holding gains and losses for available-for-sale securities?

Chart of Accounts

CHART OF ACCOUNTS

Ace Company

General Ledger

	ASSETS
111	Cash
114	Investment in Available-for-Sale Securities
119	Allowance for Change in Fair Value of Investment
121	Accounts Receivable
141	Inventory
151	Supplies
152	Prepaid Insurance

	LIABILITIES
211	Accounts Payable
221	Notes Payable
224	Interest Payable
231	Salaries Payable

	EQUITY
311	Common Stock
331	Retained Earnings
391	Unrealized Holding Gain/Loss: Available-for-Sale Securities

	REVENUE
411	Sales Revenue
431	Interest Income
435	Gain on Sale of Available-for-Sale Securities

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
513	Delivery Expense
515	Supplies Expense
521	Advertising Expense
523	Salaries Expense
531	Bad debt Expense
539	Miscellaneous Expenses
540	Interest Expense