Question 2 (30 marks)

A. On January 1, 2020, Johnstone Co. purchased 8% bonds having a maturity value of $500,000, for $542,124. The bonds, issued by City Bank, provide the bondholders a 6% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest receivable each December 31. Johnstones business model is to hold these bonds until the maturity date to collect contractual cash flows.

Required: (Round all amounts to the nearest dollar.)

(a) How should this investment be classified by Johnstone? Why?

(b) Prepare the journal entry to record the interest received and the premium amortization for 2020.

(c) Assume Johnstone Co. elected the fair value option for this investment. If the fair value of the bonds is $538,000 on December 31, 2020, prepare any necessary adjusting entry. (7 marks)

B. Castleman Holdings had the following trading equity investment portfolio on January 1, 2019:

``````````````````````````````````````Cost Fair Value

1,000 shares of Evers Corp. $15,000 $15,700

900 shares of Rogers Corp. 18,000 16,800

500 shares of Chance Corp. 4,500 3,000

``````````````````````````````````````$37,500 $35,500

In 2019, Castleman Holdings completed the following investment transactions:

March 3 Sold the 500 shares of Chance Corp., @ $7.5 less fees of $65.

April 15 Bought 200 more shares of Evers Corp., @ $16.5 plus fees of $150.

August 1 Received cash dividend from Rogers Corp. @ $1 per share

Castleman Holdings trading investment portfolio is as follows on December 31, 2019:

``````````````````````````````````````Cost Fair Value

1,200 shares of Evers Corp. $18,300 $20,800

900 shares of Rogers Corp. 18,000 17,800

``````````````````````````````````````$36,300 $38,600

All of the investments of Castleman Holdings are nominal in respect to percentage of ownership (5% or less).

Required: Prepare the journal entries for Castleman Holdings for the following transactions in 2019:

(a) The sale of the Chance Corp. shares.

(b) The purchase of the Evers Corp. shares.

(c) The 2019 adjusting entry for the trading equity investment portfolio.

(d) Briefly describe how the accounting would change if the investment portfolio was classified as non-trading. (10 marks)

C. The treasurer of Miller Co. has read on the Internet that the price of Wade Inc. ordinary shares is about to take off. In order to profit from this potential development, Miller purchased a call option on Wade shares on July 7, 2019, for 240. The call option is for 200 shares (notional value), and the strike price is 70. (The market price of a Wade share on that date is 70.) The option expires on January 31, 2020. The following data are available with respect to the call option.

Date Market ``````Price of Wade Shares ```Time Value of Call Option

September 30,2019 `````65 ````````````````````````per share 180

December 31, 2019 `````68 ``````````````````````````per share 80

January 4,2020 ```````````72 ``````````````````````````per share 60

Required: Prepare the journal entries for Miller Co. on the following dates:

(a) July 7, 2019Investment in call option on Wade shares.

(b) September 30, 2019Miller prepares financial statements.

(c) December 31, 2019Miller prepares financial statements.

(d) January 4, 2020Miller settles the call option on Wade shares. (13 marks)