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Soto Industries Inc. is an athletic footware company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Soto Industries Inc., which has a fiscal year ending on December 31: Instructions 1. Journalize the entries to record these transactions. 2. If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure?

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 15, Problem 1PA
Textbook Problem
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Soto Industries Inc. is an athletic footware company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Soto Industries Inc., which has a fiscal year ending on December 31:

Chapter 15, Problem 1PA, Soto Industries Inc. is an athletic footware company that began operations on January 1, Year 1. The

Instructions

  1. 1. Journalize the entries to record these transactions.
  2. 2. If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure?

(1)

To determine

Journalize the bond investment transactions in the books of Company G.

Explanation of Solution

Bond investment: Bond investments are debt securities which pay a fixed interest revenue to the investor.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare journal entry for purchase of $100,000 bonds of Company W, at face amount with an accrued interest of $500.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
April1Investments–Company W Bonds 100,000 
  Interest Receivable 500 
           Cash  100,500
  (To record purchase of Company W bonds for cash)   

Table (1)

  • Investments–Company W Bonds is an asset account. Since bonds investments are purchased, asset value increased, and an increase in asset is debited.
  • Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Prepare journal entry for purchase of $210,000 bonds of Company B, at face amount with an accrued interest of $700.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
June1Investments–Company B Bonds 210,000 
  Interest Receivable 700 
           Cash  210,700
  (To record purchase of Company B bonds for cash)   

Table (2)

  • Investments–Company B Bonds is an asset account. Since bonds investments are purchased, asset value increased, and an increase in asset is debited.
  • Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Prepare journal entry to record the interest revenue received from Company W bonds.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
September1Cash 3,000 
           Interest Receivable  500
           Interest Revenue  2,500
  (To record receipt of interest revenue)   

Table (3)

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
  • Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes:

Compute amount of interest received from Company W.

Interest received = {Amount of debt investment × Rate of interest×Time period}= $100,000×6%×612= $3,000

Prepare journal entry for $40,000 bonds of Company W sold at 97%, with an accrued interest of $200.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
September30Cash 39,000 
  Loss on Sale of Investments 1,200 
           Interest Revenue  200
           Investments–Company W Bonds  40,000
  (To record sale of M City bonds)   

Table (3)

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Loss on Sale of Investments is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
  • Investments–Company W Bonds is an asset account. Since bond investments are sold, asset value decreased, and a decrease in asset is credited.

Working Notes:

Calculate the cash received from the sale of bonds.

ParticularsAmount ($)
Cash proceeds from sale of  $40,000 bonds ($40,000×97%)38,800
Add: Accrued interest revenue200
Cash received$39,000

Table (4)

Calculate the realized gain (loss) on sale of $40,000 bonds.

ParticularsAmount ($)
Cash proceeds from sale of  $40,000 bonds ($40,000×97%)38,800
Cost of bonds sold(40,000)
Gain (loss) on sale of bonds$(1,200)

Table (5)

Prepare journal entry to record the interest revenue received from Company B bonds.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
November1Cash 4,200 
           Interest Receivable  700
           Interest Revenue  3,500
  (To record receipt of interest revenue)   

Table (6)

  • Cash is an asset account

(2)

To determine

Explain the impact of bonds, if the portfolio is classified as available-for-sale investment.

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Financial Accounting
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