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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 13, Problem 7P
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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 Trading Securities The following information relates to Sanders Company’s investment in trading securities for 2019:

Chapter 13, Problem 7P, Investment in Trading Securities The following information relates to Sanders Companys investment in

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 Sanders prepares semiannual financial statement.
  2. 2. Show the items of income or loss from investment transactions that Sanders 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 within one year of purchase.

1.

To determine

Record the journal entries in the books of Company S related to the investments made in the trading securities.

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.

Trading securities: these are the securities which are purchased to earn the profits due to changes in their market prices.

Record the journal entries in the books of Company S related to the investments made in the trading securities.

DateAccount Title and ExplanationDebit ($)Credit ($)
 2019Investment in trading securities29,100  
January 1    Cash 29,100
 (To record the purchase of Available-for-sale securities at discount)  
    
January 1Investment in trading securities40,400  
     Cash 40,400
 (To record the purchase of Available-for-sale securities at premium)  
    
June 30Cash (1)1,200  
 Investment in trading securities 255  
 Interest income (2) 1,455
 (To record the earned interest and amortization of discount)  
    
June 30Cash (3)2,000  
 Investment in trading securities  20
 Interest income (4) 1,980
 (To record the earned interest and amortization of premium)  
    
June 30Investment in trading securities (5) 225  
  Unrealized holding gain/loss: Trading securities  225
 (To adjust the allowance and the unrealized gain on holding the Securities)  
    
July 1Investment in trading securities23,000  
 Cash 23,000
 (To record the purchase of Available-for-sale securities at discount)  
    
November 30Interest receivable (6)1,146  
 Investment in trading securities 4  
 Interest income (7) 1,150
 (To record the interest earned for 5 months)  
    
November 30Cash ($22,750+$1,146)23,896  
 Loss on sale of Available-for-sale Securities  ($23,000+$4−$22,750) 254  
 Investment in trading securities 23,004
 Interest receivable 1,146
 (To record the sale of Corporation W's bond on loss)  
    
December 31Cash (8)1,200  
 Investment in trading securities 268  
 Interest income (9) 1,468
 (To record the earned interest and amortization of discount)  
    
December 31Cash (10)2,000  
 Investment in trading securities 21
 Interest income (11) 1,979
 (To record the earned interest and amortization of premium)  
    
December 31Cash41,000  
 Gain on sale of trading securities ($40,800−$21) 40,779
 Investment in trading securities 221
 (To record the sale of Company M's bond at gain)  
    
December 31Unrealized holding gain/loss: Available-for-sale securities 628  
 Investment in trading securities (12)  628
 (To adjust the allowance and the unrealized loss on holding the Securities)  

Table (1)

Working note (1):

Calculate the amount of cash received as interest.

Cash = Face value of bond ×Stated interest rate ×6months12months=$30,000×8%×612=$1,200

Working note (2):

Calculate the amount of interest income:

Interest income= Purchase price of bond ×Market interest rate ×6months12months=$29,100×10%×612=$1,455

Working note (3):

Calculate the amount of cash received as interest.

Cash = Face value of bond ×Stated interest rate ×6months12months=$40,000×10%×612=$2,000

Working note (4):

Calculate the amount of interest income:

Interest income= Purchase price of bond ×Market interest rate ×6months12months=$40,400×9

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 balance sheet.

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