Principles of Financial Accounting.
24th Edition
ISBN: 9781260158625
Author: Wild
Publisher: MCG
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Chapter 15, Problem 1BP
1.
To determine
Prepare the
1.
Expert Solution
Explanation of Solution
Debt investments:
The investments which are made by the investors in debts instrument is called as debt investment. Debt investments lend funds to the borrowing company with predetermined agreement for interest and maturity date. Corporate bonds, government bonds and certificate of deposits are examples of debt investment.
Prepare the journal entries to record the given transactions as follows:
July 28– Purchased Company T’s bonds
| Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
| July 28 | Debt investment - Trading | 30,000 | ||
| Cash | 30,000 | |||
| (To record purchase of trading securities) |
Table (1)
- Debt investment – Trading is an asset account, and it increases the value of assets by $30,000. Hence, debit the debt investment –trading with $30,000.
- Cash is an asset account and it decreases the value of asset by $30,000. Therefore, credit the cash account for $30,000.
August, 17 – Purchased Company K’s bonds
| Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
| August, 17 | Debt investment - Trading | 105,000 | ||
| Cash | 105,000 | |||
| (To record purchase of trading securities) |
Table (2)
- Debt investment – Trading is an asset account, and it increases the value of assets by $105,000. Hence, debit the debt investment –trading with $105,000.
- Cash is an asset account and it decreases the value of asset by $105,000. Therefore, credit the cash account for $105,000.
August, 26 – Purchased Company F’s bonds
| Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
| August, 26 | Debt investment - Trading | 60,000 | ||
| Cash | 60,000 | |||
| (To record purchase of trading securities) |
Table (3)
- Debt investment – Trading is an asset account, and it increases the value of assets by $60,000. Hence, debit the debt investment –trading with $60,000.
- Cash is an asset account and it decreases the value of asset by $60,000. Therefore, credit the cash account for $60,000.
September 5 – Company A sold Company T’s bond at $6,000 cost.
| Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
| September 5 | Cash | 6,300 | ||
| Gain on sale of debt investment (1) | 300 | |||
| Debt investment-Trading | 6,000 | |||
| (To record the sale of trading securities in cash) |
Table (4)
- Cash is an asset account and it increases the value of asset by $6,300. Therefore, debit the cash account for $6,300.
- Gain on sale of trading is a component of owner’s equity (revenue), and it increases the value of equity by $300. Hence, credit the gain on sale of trading securities account with $300.
- Debit investment – Trading is an asset account, and it decreases the value of assets by $6,000. Hence, credit the debt investment account with $6,000.
Working note:
Calculate the gain on sale debt investment
September 8 – Company A sold Company K’s bond at $45,000 cost.
| Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
| September 8 | Cash | 46,200 | ||
| Gain on sale of debt investment (2) | 1,200 | |||
| Debt investment-Trading | 45,000 | |||
| (To record the sale of trading securities in cash) |
Table (5)
- Cash is an asset account and it increases the value of asset by $46,200. Therefore, debit the cash account for $46,200.
- Gain on sale of trading is a component of owner’s equity (revenue), and it increases the value of equity by $1,200. Hence, credit the gain on sale of trading securities account with $1,200.
- Debit investment – Trading is an asset account, and it decreases the value of assets by $45,000. Hence, credit the debt investment account with $45,000.
Working note:
Calculate the gain on sale debt investment
October 12– Purchased Company M’s bonds
| Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
| October 12 | Debt investment - Trading | 120,000 | ||
| Cash | 120,000 | |||
| (To record purchase of trading securities) |
Table (6)
- Debt investment – Trading is an asset account, and it increases the value of assets by $120,000. Hence, debit the debt investment –trading with $120,000.
- Cash is an asset account and it decreases the value of asset by $120,000. Therefore, credit the cash account for $120,000.
November 28 – Company A sold Company F’s bond at $54,000 cash.
| Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
| November, 28 | Cash | 54,000 | ||
| Loss on sale of debt investment (3) | 6,000 | |||
| Debt investment-Trading | 60,000 | |||
| (To record the sale of trading securities in cash) |
Table (7)
- Cash is an asset account and it increases the value of asset by $54,000. Therefore, debit the cash account for $54,000.
- Loss on sale of trading is a component of owner’s equity (loss), and it decreases the value of equity by $6,000. Hence, debit the loss on sale of trading securities account with $6,000.
- Debit investment – Trading is an asset account, and it decreases the value of assets by $60,000. Hence, credit the debt investment account with $60,000.
Working note:
Calculate the loss on sale debt investment
2.
To determine
Prepare a table to compare the year-end cost and fair values of the given debt securities.
2.
Expert Solution
Explanation of Solution
Prepare a table to compare the year-end cost and fair values of the given debt securities as follows:
| Portfolio of Trading Securities | Cost | Fair Value | Unrealized Gain (Loss) |
| Company T's bonds | 24,000 (4) | 25,500 | |
| Company K's bonds | 60,000 (5) | 66,000 | |
| Company M's bonds | 120,000 | 117,000 | |
| 204,000 | 208,500 | 4,500 (6) |
Table (8)
Working note:
Calculate the cost of company T’s bond after sales are made.
Calculate the cost of company K’s bond after sales are made.
Calculate the unrealized gain (or loss).
3.
To determine
Prepare the year-end fair value
3.
Expert Solution
Explanation of Solution
Prepare the year-end fair value adjustment entry for the trading securities’ portfolio as follows:
| Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
| December 31 | Fair Value Adjustment-Trading (6) | 4,500 | ||
| Unrealized Gain-Income | 4,500 | |||
| (To record the unrealized gain in fair value of trading securities) |
Table (9)
- Fair Value Adjustment is a contra-asset account. The account shows a debit balance since the market price has increased (gain). Therefore, debit the fair value adjustment with $4,500.
- Unrealized Gain–income is an adjustment account to report the investment at fair market value. Since gain has occurred while adjusting. Therefore, credit the unrealized gain–income account with $4,500.
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Principles of Financial Accounting.
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