Accounting for debt investmentsOn February 1, 2018, Bell Co. decides to invest excess cash of $16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was $19,600. The investment is categorized as a trading debt investment.RequirementsJournalize the transactions for Bell’s investment in Grant, Inc. for 2018.In what category and at what value would Bell report the asset on the December 31, 2018, balance sheet? In what account would the market price change in Grant’s bond be reported, if at all?What was the net effect of the investment on Bell’s net income for the year ended December 31, 2018?

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Asked Jan 11, 2020
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Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of $16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was $19,600. The investment is categorized as a trading debt investment.

Requirements

  1. Journalize the transactions for Bell’s investment in Grant, Inc. for 2018.
  2. In what category and at what value would Bell report the asset on the December 31, 2018, balance sheet? In what account would the market price change in Grant’s bond be reported, if at all?
  3. What was the net effect of the investment on Bell’s net income for the year ended December 31, 2018?
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Expert Answer

Step 1

Trading Debt Investments:

Trading debt investments are the investments in debt securities where the investors wish to sell these investments at a short notice like in a few days, week, or months to generate some profit out of it. They are treated as current assets.

1.

The journal entries of Company B’s investment in G incorporation for 2018 are as follows:

 

Accounting homework question answer, step 1, image 1
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Step 2

2.

Company B would report its asset (trading debt investment) under the category of ‘Current assets’ at its fair value of $19,600, on its balance sheet as on December 31, 2018.

  • Fair value refers to the price of the securities in the market, if the company has decided to sell the securities.
  • At the end of each period, the company will pass adjustment entries to the trading debt investments in order to bring those investment accounts to the fair value (market value), and thus, the trading debt investments will be recorded at its fair value under...

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