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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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Available-for-Sale Securities On December 31, 2018, Marsh Company held Xenon Company bonds in its portfolio of available-for-sale securities. The bonds have a par value of $15,000, carry a 10% annual interest rate, mature in 2025, and had originally been purchased at par. The market value of the bonds at December 31, 2018 was $13,000. The December 31, 2018, balance sheet showed the following:

Chapter 13, Problem 11E, Available-for-Sale Securities On December 31, 2018, Marsh Company held Xenon Company bonds in its

On January 1, 2019, Marsh acquired bonds of Yellow Company with a par value of SI 6,000 for $16,200. The Yellow Company bonds carry an annual interest rate of 12% and mature on December 31, 2023. Additionally, Marsh acquired Zebra Company bonds with a lace value of 18,000 for $17,600. The Zebra Company bonds carry an 8% annual interest rate and mature on December 31, 2028. At the end of 2019, the respective market values of the bonds were: Xenon, $14,000; Yellow, $17,000; and Zebra, $20,000. Marsh classifies all of the debt securities as available-for-sale as it does not intend to hold them to maturity nor does it intend to actively buy and sell them. Assume that Marsh uses the straight-line method to amortize any discounts or premiums.

Required:

  1. 1. Prepare the journal entries necessary to record the purchase of the investments on January 1, 2019, the annual interest payments on December 31, 2019, and the adjusting entry needed on December 31, 2019.
  2. 2. What would Marsh disclose on its December 31, 2019, balance sheet related to these investments?

1.

To determine

Prepare the journal entry to record the purchase of investment on January 1, 2019, annual interest payments on December 31, 2019 and the adjusting entry on December 31, 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.

Prepare the journal entry to record the purchase of investment on January 1, 2019:

DateAccount Title and Explanation Debit ($)

 Credit

($)

January 1, 2019Investment in Available-for-sale-securities16,200 
         Cash 16,200
 (To record the purchase of investment)  

Table (1)

DateAccount Title and Explanation Debit ($)

 Credit

($)

January 1, 2019Investment in Available-for-sale-securities17,600 
         Cash 17,600
 (To record the purchase of investment)  

Table (2)

Prepare the journal entry to record the annual interest payments:

DateAccount Title and Explanation Debit ($)

 Credit

($)

December 31, 2019Cash ($15,000×0.10×1212)1,500 
     Interest income 1,500
 (To record the interest income)  

Table (3)

DateAccount Title and Explanation Debit ($)

 Credit

($)

December 31, 2019Cash ($16000×0

2.

To determine

Identify the amount that is related to investment that would be reported in the balance sheet as of December 31, 2019.

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