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 $71,400 of Welch Co. 9%, 15-year bonds at their face amount plus accrued interest of $1,071. The bonds pay interest semiannually on March 1 and September 1.

June 1. Purchased $60,000 of Bailey 8%, 10-year bonds at their face amount plus accrued interest of $200. The bonds pay interest semiannually on May 1 and November 1.

Sept. 1 Received semiannual interest on the Welch Co. bonds.

30 Sold $26,400 of Welch Co. bonds at 97 plus accrued interest of $198.

Nov. 1 Received semiannual interest on the Bailey bonds.

Dec. 31 Accrued $1,350 interest on the Welch Co. bonds.

31 Accrued $800 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

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.