Debt Investments

E17-2 (Entries for Held-to-Maturity Securities)

On January 1, 2017, Dagwood Company purchased at par 6% bonds having a maturity value of
$300,000. The bonds mature on January 1, 2022, with interest received on January 1 of each
year. The bonds are classified as held-to-maturity.
Instructions
(a) Prepare the journal entry at the date of the bond issuance.
(b) Prepare the journal entry to record the interest revenue on December 31, 2017.
(c) Prepare the journal entry to record the interest received on January 1, 2018.

Solution
EXERCISE 17-2 (10–15 minutes)

(a) January 1, 2017

Debt Investments........................................................................ 300,000
Cash................................................................................... 300,000

(b) December 31, 2017

Interest Receivable...................................................................... 18,000
Interest Revenue (6% x 300,000)...................................... 18,000

(c) January 1, 2018

Cash ........................................................................................... 18,000
Interest Receivable ........................................................... 18,000

E17-4 (Entries for Available-for-Sale Securities)

On January 1, 2017, Hi and Lois Company purchased 12% bonds having a maturity value of
$300,000 for $322,744.44. The effective interest rate is 10%. The bonds mature on January 1,
2022, with interest received on January 1 of each year. The investment is classified as available-
for-sale. Assume effective-interest rate method of amortization for premiums or discounts. The
fair value of the bonds at December 31 of each year is as follows.
2017 $320,500
2018 $309,000
Instructions
(a) Prepare the journal entry at the date of the bond issuance.
(b) Prepare the journal entries to record the interest revenue and recognition of fair value for
2017.
(c) Prepare the journal entry to record the recognition of fair value for 2018.

Solution
EXERCISE 17-4 (10–15 minutes)

(a) January 1, 2017

Debt Investments.........................................................322,744.44
Cash...................................................................................... 322,744.44

(b) December 31, 2017

Interest Receivable .............................................................36,000

Debt Investments................................................................. 3,725.56
Interest Revenue ($322,744.44 X .10)................................. 32,274.44
.............................................................................................. 32,274.44

Fair Value Adjustment ................................................................. 1,481.12

Unrealized Holding Gain or Loss—Equity
   ($320,500.00 – $319,018.88)............................................ 1,481.12

(c) December 31, 2018

Unrealized Holding Gain or Loss—Equity.................................... 7,401.89

Fair Value Adjustment ........................................................ 7,401.89

Amortized Unrealized Gain

Cost Fair Value (Loss)
Available-for-sale bonds $314,920.77 $309,000.00 $(5,920.77)
Previous fair value adjustment—Dr.
1,481.12
Fair value adjustment—Cr. $(7,401.89)
 BE17-3
Carow Corporation purchased on January 1, 2017, as a held-to-maturity investment, $60,000 of
the 8%, 5-year bonds of Harrison, Inc. for $65,118, with an effective interest rate of 6%. The
bonds pay interest semi-annually. Assume the company uses the effective-interest rate method to
amortize discounts and premiums.
Instructions
(a) Prepare the journal entry for the purchase of the investment.
(b) Prepare the journal entries for the receipt of semi-annual interest and premium
amortization.

Solution
BRIEF EXERCISE 17-3
January 1, 2017
(a) Debt Investments................................................................................... 65,118
Cash.............................................................................................. 65,118

June 30, 2017

6
(b) Cash ($60,000 X .08 X /12)................................................................. 2,400
Debt Investments......................................................................... 446
6
Interest Revenue ($65,118 X .06 X /12).................................... 1,954

E17-9 (Available-for-Sale Debt Securities Entries)

At December 31, 2017, the available-for-sale debt portfolio for Steffi Graf, Inc. is as follows.
Security Cost Fair Value Unrealized Gain(loss)
A $17,500 $15,000 ($2,500)
B 12,500 14,000 1,500
C 23,000 25,500 2,500
Total $53,000 $54,500 $1,500
Previous fair value $400
adjustment balance (debit)

On January 20, 2018, Steffi Graf Inc. sold security A for $15,100. The sale proceeds are net of
brokerage fees.
Instructions
(a) Prepare the adjusting entry at December 31, 2017, to report the portfolio at fair value.
(b) Prepare the journal entry for the 2018 sale of security A.

Solution
EXERCISE 17-9 (10–15 minutes)

(a) The portfolio should be reported at the fair value of $54,500. Since the cost of the portfolio
is $53,000, the unrealized holding gain is $1,500, of which $400 is already recognized.
Therefore, the December 31, 2017 adjusting entry should be:

Fair Value Adjustment................................................................................. 1,100

Unrealized Holding Gain or Loss—Equity........................................
1,100

(b) Computation of realized gain or loss on sale of debt security:

Net proceeds from sale of security A $15,100
Cost of security A (17,500)
Loss on sale of security A ($ 2,400)
January 20, 2018
Cash ...........................................................................................15,100
Loss on Sale of Investments.........................................................2,400
Debt Investments......................................................................... 17,500