Baldwin Inc. is an athletic footware company that began operations on January 1, 2014. The following transactions relate to debt investments acquired by Baldwin Inc., which has a fiscal year ending on December 31:
2014
Mar. 1. Purchased $50,000 of Buncombe Co. 6%, 10-year bonds at their face amount plus accrued interest of $250. The bonds pay interest semiannually on February 1 and August 1.
16. Purchased $84,000 of French Broad 5%, 15-year bonds at their face amount plus accrued interest of $175. The bonds pay interest semiannually on March 1 and September 1.
Aug. 1. Received semiannual interest on the Buncombe Co. bonds.
31. Sold $20,000 of Buncombe Co. bonds at 99 plus accrued interest of $100.
Sept. 1. Received semiannual interest on the French Broad bonds.
Dec. 31. Accrued $750 interest on the Buncombe Co. bonds. 31. Accrued $1,400 interest on the French Broad bonds.
2015
Feb. 1. Received semiannual interest on the Buncombe Co. bonds.
Mar. 1. Received semiannual interest on the French Broad bonds.
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?
Answer:
1.
2014
Mar. 1 Investments—Buncombe Co. Bonds 50,000
Interest Receivable 250
Cash 50,250
16 Investments—French Broad Bonds 84,000
Interest Receivable 175
Cash 84,175
Aug. 1 Cash* 1,500
Interest Receivable 250
Interest Revenue 1,250
*$50,000 × 6% × 1/2
31 Cash* 19,900
Loss on Sale of Investment 200
Interest Revenue 100
Investments—Buncombe Co. Bonds 20,000
*($20,000 × 0.99) + $100
Sept. 1 Cash* 2,100
Interest Receivable 175
Interest Revenue 1,925
*$84,000 × 5% × 1/2
Dec. 31 Interest Receivable 750
Interest Revenue 750
31 Interest Receivable 1,400
Interest Revenue 1,400
2015
Feb. 1 Cash* 900
Interest Receivable 750
Interest Revenue 150
*$30,000 × 6% × 1/2
Mar. 1 Cash* 2,100
Interest Receivable 1,400
Interest Revenue 700
*$84,000 × 5% × 1/2
2. If the bonds are classified as available-for-sale securities, then the portfolio
of bonds would need to be adjusted to fair value. This would be accomplished
by using a valuation allowance account and an unrealized gain (loss) account as
part of stockholders’ equity. If the fair value were greater than the cost of the
bond portfolio, the two accounts would be positive, and thus added to investments
and stockholders’ equity, respectively. If the fair value were less than the cost of the
bond portfolio, the two accounts would be negative, and thus subtracted from
investments and stockholders’ equity, respectively.
2014
Mar. 1. Purchased $50,000 of Buncombe Co. 6%, 10-year bonds at their face amount plus accrued interest of $250. The bonds pay interest semiannually on February 1 and August 1.
16. Purchased $84,000 of French Broad 5%, 15-year bonds at their face amount plus accrued interest of $175. The bonds pay interest semiannually on March 1 and September 1.
Aug. 1. Received semiannual interest on the Buncombe Co. bonds.
31. Sold $20,000 of Buncombe Co. bonds at 99 plus accrued interest of $100.
Sept. 1. Received semiannual interest on the French Broad bonds.
Dec. 31. Accrued $750 interest on the Buncombe Co. bonds. 31. Accrued $1,400 interest on the French Broad bonds.
2015
Feb. 1. Received semiannual interest on the Buncombe Co. bonds.
Mar. 1. Received semiannual interest on the French Broad bonds.
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?
Answer:
1.
2014
Mar. 1 Investments—Buncombe Co. Bonds 50,000
Interest Receivable 250
Cash 50,250
16 Investments—French Broad Bonds 84,000
Interest Receivable 175
Cash 84,175
Aug. 1 Cash* 1,500
Interest Receivable 250
Interest Revenue 1,250
*$50,000 × 6% × 1/2
31 Cash* 19,900
Loss on Sale of Investment 200
Interest Revenue 100
Investments—Buncombe Co. Bonds 20,000
*($20,000 × 0.99) + $100
Sept. 1 Cash* 2,100
Interest Receivable 175
Interest Revenue 1,925
*$84,000 × 5% × 1/2
Dec. 31 Interest Receivable 750
Interest Revenue 750
31 Interest Receivable 1,400
Interest Revenue 1,400
2015
Feb. 1 Cash* 900
Interest Receivable 750
Interest Revenue 150
*$30,000 × 6% × 1/2
Mar. 1 Cash* 2,100
Interest Receivable 1,400
Interest Revenue 700
*$84,000 × 5% × 1/2
2. If the bonds are classified as available-for-sale securities, then the portfolio
of bonds would need to be adjusted to fair value. This would be accomplished
by using a valuation allowance account and an unrealized gain (loss) account as
part of stockholders’ equity. If the fair value were greater than the cost of the
bond portfolio, the two accounts would be positive, and thus added to investments
and stockholders’ equity, respectively. If the fair value were less than the cost of the
bond portfolio, the two accounts would be negative, and thus subtracted from
investments and stockholders’ equity, respectively.
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