Chapter 16 Flashcards
Garfield Company purchased, on January 1, 2025, as a held-to-maturity investment, $80,000 of the 9%, 5-year bonds of Chester Corporation for $74,086, which provides an 11% return. Prepare Garfield’s journal entries for (a) the purchase of the investment, and (b) the receipt of annual interest and discount amortization. Assume effective-interest amortization is used.
a) 1/1:
D - Debt Investments: 74,086
C - Cash: 74,086
b) 12/31:
D - Cash (80,000 x 0.09): 7,200
D - Debt Investments: 949
C - Interest Revenue (74,086 x 0.11): 8,149
Garfield Company purchased, on January 1, 2025, as a held-to-maturity investment, $80,000 of the 9%, 5-year bonds of Chester Corporation for $74,086, which provides an 11% return. Prepare Garfield’s journal entries for (a) the purchase of the investment, and (b) the receipt of annual interest and discount amortization. Assume effective-interest amortization is used.
Use the information from the above problem but assume the bonds are purchased as an available-for-sale security. Prepare Garfield’s journal entries for (a) the purchase of the investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of $75,500.
a) 1/1:
D - Debt Investments: 74,086
C - Cash: 74,086
b) 12/31:
D - Cash (80,000 x 0.09): 7,200
D - Debt Investments: 949
C - Interest Revenue (74,086 x 0.11): 8,149
c)
D - Fair Value Adjustment: 465
C - Unrealized Holding Gain or Loss - Equity ((74,086 + 949) - 75,500): 465
Carow Corporation purchased on January 1, 2025, as a held-to-maturity investment, $60,000 of the 8%, 5-year bonds of Harrison, Inc. for $65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow’s journal entries for (a) the purchase of the investment, and (b)the receipt of semiannual interest and premium amortization. Assume effective-interest amortization is used.
a) 1/1:
D - Debt Investments: 65,118
C - Cash: 65,118
b) 6/30:
D - Cash (60,000 x 0.08 x 6/12): 2,400
C - Debt Investments: 446
C - Interest Revenue (65,118 x 0.06 x 6/12): 1,954
Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31, Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400. Prepare Hendricks’ journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)
(a)
D - Debt Investments: 50,000
C - Cash: 50,000
(b)
D - Cash: 2,000
C - Interest Revenue: 2,000
(c)
D - Unrealized Holding Gain or Loss - Income: 2,600
C - Fair Value Adjustment (50,000 - 47,400): 2,600
On January 1, 2025, Hi and Lois Company purchased 12% bonds having a maturity value of $300,000 for $322,744. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2025, and mature January 1, 2030, with interest received on January 1 of each year. Hi and Lois Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.
a) Prepare the journal entry at the date of the bond purchase.
b) Prepare a bond amortization schedule.
c) Prepare the journal entry to record the interest revenue and the amortization at December 31, 2025.
d) Prepare the journal entry to record the interest revenue and the amortization at December 31, 2026.
a)
1/1:
D - Debt Investments: 322,744
C - Cash: 322,744
b) See image
c)
12/31:
D - Interest Receivable: 36,000
C - Debt Investments: 3,726
C - Interest Revenue: 32,274
d)
12/31:
D - Interest Receivable: 36,000
C - Debt Investments: 4,098
C - Interest Revenue: 31,902
On January 1, 2025, Hi and Lois Company purchased 12% bonds having a maturity value of $300,000 for $322,744. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2025, and mature January 1, 2030, with interest received on January 1 of each year. Hi and Lois Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale.
The fair value of the bonds at December 31 of each year-end is as follows:
2025: $320,500
2026: $309,000
2027: $308,000
2028: $310,000
2029: $300,000
a) Prepare the journal entry at the date of the bond purchase.
b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2025.
c) Prepare the journal entry to record the recognition of fair value for 2026.
a)
1/1:
D - Debt Investments: 322,744
C - Cash: 322,744
b)
12/31/25:
D - Interest Receivable: 36,000
C - Debt Investments: 3,726
C - Interest Revenue (322,744 x 0.10): 32,274
D - Fair Value Adjustment: 1,481
C - Unrealized Holding Gain or Loss - Equity (320,500 - 319,019): 1,481
c)
12/31/26:
314,921 - 309,000 = 5,921 + 1,481 = 7,402
D - Unrealized Holding Gain or Loss - Equity: 7,402
C - Fair Value Adjustment: 7,402
Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of $13 per share on March 18, 2025. On June 30, Martinez declared and paid $75,000 cash dividends to all stockholders. On December 31, Martinez reported net income of $122,000 for the year. At December 31, the market price of Martinez Fashion was $15 per share.
This must be solved using the Fair Value Method.
3/18:
200,000 x 10% = 20,000
D - Equity Investments (20,000 x 13): 260,000
C - Cash: 260,000
6/30:
D - Cash: 7,500
C - Dividend Revenue (75,000 x 0.10): 7,500
12/31:
(15 - 13) x 20,000 = 40,000
D - Fair Value Adjustment: 40,000
C - Unrealized Holding Gain or Loss - Income: 40,000
Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2025. On June 15, Seles declared and paid cash dividends of $36,000 to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.
This must be solved using the Equity Method.
1/1:
D - Equity Investment: 81,000
C - Cash ((30,000 x 0.30) x 9): 81,000
6/15:
D - Cash (36,000 x 0.30): 10,800
C - Equity Investment: 10,800
12/31:
D - Equity Investment (0.30 x 85,000): 25,500
C - Investment Income: 25,500
Kenseth Company has the following securities in its portfolio on December 31, 2025. None of these investments are accounted for under the equity method:
1,500 shares of Gordon, Inc., common:
- Cost: 73,500
- Fair Value: 69,000
5,000 shares of Wallace Corp., common:
- Cost: 180,000
- Fair Value: 175,000
400 shares of Martin, Inc., preferred:
- Cost: 60,000
- Fair Value: 61,600
Total Cost: 313,500
Total Fair Value: 305,600
———
All of the securities were purchased in 2025.
In 2026, Kenseth completed the following securities transactions.
- March 1: Sold the 1,500 shares of Gordon, Inc., common, @ $45 less fees of $1,200.
- ## April 1: Bought 700 shares of Earnhart Corp., common, @ $75 plus fees of $1,300.Kenseth’s portfolio of equity securities appeared as follows on December 31, 2026:
5,000 shares of Wallace Corp., common:
- Cost: 180,000
- Fair Value: 175,000
700 shares of Earnhart Corp., common:
- Cost: 53,800
- Fair Value: 50,400
400 shares of Martin, Inc., preferred:
- Cost: 60,000
- Fair Value: 58,000
Total Cost: 293,800
Total Fair Value: 283,400
———
Prepare the general journal entries for Kenseth Company for:
a) The 2025 adjusting entry.
b) The sale of the Gordon stock.
c) The purchase of the Earnhart stock.
d) The 2026 adjusting entry for the portfolio.
a) 12/31/25
D - Unrealized Holding Gain or Loss - Income: 7,900
C - Fair Value Adjustment (313,500 - 305,600): 7,900
b) 3/1/26
D - Cash ((1,500 x 45) - 1,200): 66,300
D - Loss on Sale of Investments: 7,200
C - Equity Investments: 73,500
c) 4/1/26
D - Equity Investments ((700 x 75) + 1,300): 53,800
C - Cash: 53,800
d) 12/31/26
(work shown in image)
D - Unrealized Holding Gain or Loss - Income: 2,500
C - Fair Value Adjustment: 2,500
