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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Investment in Available-for-Sale Bonds The following information relates to Starr Company’s investment in available-for-sale bonds for 2019:

Chapter 13, Problem 10P, Investment in Available-for-Sale Bonds The following information relates to Starr Companys

Required:

  1. 1. Prepare journal entries to record the previous information for 2019. Use the effective interest method and round all amounts to the nearest dollar. Assume that Starr prepares semiannual financial statements.
  2. 2. Show the items of income or loss from investment transactions that Starr reports for each 2019 semiannual income statement.
  3. 3. Show how the investment items are reported on each of the 2019 semiannual balance sheets, assuming that management expects to dispose of all investments with in one year of purchase.

1.

To determine

Record the journal entries in the books of Company S for the year 2019.

Explanation

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Record the journal entries in the books of Company S for the year 2019.

DateAccount Title and Explanation

Debit

($)

Credit ($)
January 1, 2019Investment in Available-for-sale Securities29,100 
     Cash 29,100
 (To record the purchase of Available-for-sale securities at discount)  
    
January 1, 2019Investment in Available-for-sale Securities40,400 
     Cash 40,400
 (To record the purchase of Available-for-sale securities at premium)  
    
June 30, 2019Cash ($30,000×0.08×12)1,200 
     Investment in Available-for-    sale Securities255 
     Interest income     ($29,100×0.10×12) 1,455
 (To record the earned interest and amortization of discount)  
    
June 30, 2019Cash ($40,000×0.10×12)2,000 
     Investment in Available-for-    sale Securities20
     Interest income     ($40,400×0.098×12) 1,980
 (To record the earned interest and amortization of premium)  
    
June 30, 2019Allowance for change in fair value of investment (1)225  
     Unrealized holding gain/loss:     Available-for-sale securities 225
 (To adjust the allowance and the unrealized gain on holding the Securities)  
    
July 1, 2019Investment in Available-for-sale Securities23,000 
     Cash 23,000
 (To record the purchase of Available-for-sale securities at discount)  
November 30, 2019Interest receivable ($25,000×0.11×512)1,146 
 Investment in Available-for-    sale Securities4 
     Interest income     ($23,000×0.12×512) 1,150
 (To record the interest earned for 5 months)  
    
November 30, 2019Cash ($22,750+$1,146)23,896 
 Loss on sale of Available-for-sale Securities254 
         Investment in Available-for-sale Securities 23,004
       Interest receivable 1,146
 (To record the sale of Corporation W's bond on loss)  
    
December 31, 2019Cash ($30,000×0

2.

To determine

Show the items that would be reported as income or loss from the investment in the income statement.

3.

To determine

Show the way in which the investments items are reported in the 2019 semi-annual balance sheets.

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