Soto Industries Inc. is an athletic footware company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Soto Industries Inc., which has a fiscal year ending on December 31:

Record these transactions on page 10

Year 1
Apr.	1.	Purchased $83,400 of Welch Co. 7%, 15-year bonds at their face amount plus accrued interest of $973. The bonds pay interest semiannually on March 1 and September 1.
June	1.	Purchased $62,400 of Bailey 6%, 10-year bonds at their face amount plus accrued interest of $156. The bonds pay interest semiannually on May 1 and November 1.
Sept.	1	Received semiannual interest on the Welch Co. bonds.
	30	Sold $34,800 of Welch Co. bonds at 99 plus accrued interest of $203.
Nov.	1	Received semiannual interest on the Bailey bonds.
Dec.	31	Accrued $1,134 interest on the Welch Co. bonds.
	31	Accrued $624 interest on the Bailey bonds.

Record these transactions on page 11

Year 2
Mar.	1	Received semiannual interest on the Welch Co. bonds.
May	1	Received semiannual interest on the Bailey bonds.

Required:

1.	Journalize the entries to record these transactions. Refer to the information given and the Chart of Accounts provided for the exact wording of the answer choices for text entries.
2.	If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure?

CHART OF ACCOUNTS

Soto Industries Inc.

General Ledger

	ASSETS
110	Cash
111	Petty Cash
120	Accounts Receivable
121	Allowance for Doubtful Accounts
131	Notes Receivable
132	Interest Receivable
141	Merchandise Inventory
145	Office Supplies
146	Store Supplies
151	Prepaid Insurance
161	Investments-Welch Co. Bonds
162	Investments-Bailey Bonds
165	Valuation Allowance for Trading Investments
166	Valuation Allowance for Available-for-Sale Investments
181	Land
191	Store Equipment
192	Accumulated Depreciation-Store Equipment
193	Office Equipment
194	Accumulated Depreciation-Office Equipment

	LIABILITIES
210	Accounts Payable
221	Notes Payable
231	Interest Payable
241	Salaries Payable
251	Sales Tax Payable

	EQUITY
311	Common Stock
312	Paid-In Capital in Excess of Par-Common Stock
321	Preferred Stock
322	Paid-In Capital in Excess of Par-Preferred Stock
331	Treasury Stock
332	Paid-In Capital from Sale of Treasury Stock
340	Retained Earnings
350	Unrealized Gain (Loss) on Available-for-Sale Investments
351	Cash Dividends
352	Stock Dividends
390	Income Summary

	REVENUE
410	Sales
611	Interest Revenue
612	Dividend Revenue
631	Gain on Sale of Investments
641	Unrealized Gain on Trading Investments

	EXPENSES
511	Cost of Merchandise Sold
512	Bad Debt Expense
515	Credit Card Expense
516	Cash Short and Over
520	Salaries Expense
531	Advertising Expense
532	Delivery Expense
533	Repairs Expense
534	Selling Expenses
535	Rent Expense
536	Insurance Expense
537	Office Supplies Expense
538	Store Supplies Expense
561	Depreciation Expense-Store Equipment
562	Depreciation Expense-Office Equipment
590	Miscellaneous Expense
710	Interest Expense
731	Loss on Sale of Investments
741	Unrealized Loss on Trading Investments

1a. Journalize the entries to record Year 1 transactions. Refer to the information given and the Chart of Accounts provided for the exact wording of the answer choices for text entries.

PAGE 10

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION		DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17		Adjusting Entries
18
19
20
21

1b. Journalize the entries to record Year 2 transactions. Refer to the information given and the Chart of Accounts provided for the exact wording of the answer choices for text entries.

PAGE 11

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION		DEBIT	CREDIT
1
2
3
4
5
6

2. If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure?

If the bonds are classified as available-for-sale securities, then the portfolio of bonds would need to be __________. This would be accomplished by using a valuation allowance account and an unrealized gain (loss) account as part of ________________ . If the fair value were ____________ than the cost of the bond portfolio, the two accounts would be positive and, thus, added to investments and stockholders equity, respectively. If the fair value were ________________ than the cost of the bond portfolio, the two accounts would be negative and, thus, subtracted from investments and stockholders equity, respectively.