Rekya Mart Inc. is a general merchandise retail company that began operations on January 1, 2014

Rekya Mart Inc. is a general merchandise retail company that began operations on January 1, 2014. The following transactions relate to debt investments acquired by Rekya Mart Inc., which has a fiscal year ending on December 31:

2014
Apr. 1. Purchased $90,000 of Smoke Bay 6%, 10-year bonds at their face amount plus accrued interest of $900. The bonds pay interest semiannually on February 1 and August 1.

May 16. Purchased $42,000 of Geotherma Co. 4%, 12-year bonds at their face amount plus accrued interest of $70. The bonds pay interest semiannually on May 1 and November 1.

Aug. 1. Received semiannual interest on the Smoke Bay bonds.

Sept. 1. Sold $12,000 of Smoke Bay bonds at 101 plus accrued interest of $60.

Nov. 1. Received semiannual interest on the Geotherma Co. bonds.

Dec. 31. Accrued $1,950 interest on the Smoke Bay bonds.

31. Accrued $280 interest on the Geotherma Co. bonds.


2015
Feb. 1. Received semiannual interest on the Smoke Bay bonds.
May 1. Received semiannual interest on the Geotherma Co. 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
Apr. 1 Investments—Smoke Bay Bonds 90,000
Interest Receivable 900
Cash 90,900
May 16 Investments—Geotherma Co. Bonds 42,000
Interest Receivable 70
Cash 42,070
Aug. 1 Cash* 2,700
Interest Receivable 900
Interest Revenue 1,800
*$90,000 × 6% × 1/2
Sept. 1 Cash* 12,180
Interest Revenue 60
Gain on Sale of Investment 120
Investments—Smoke Bay Bonds 12,000
*($12,000 × 1.01) + $60
Nov. 1 Cash* 840
Interest Receivable 70
Interest Revenue 770
*$42,000 × 4% × 1/2
Dec. 31 Interest Receivable 1,950
Interest Revenue 1,950
Accrued interest.
31 Interest Receivable 280
Interest Revenue 280
Accrued interest.
2015
Feb. 1 Cash* 2,340
Interest Receivable 1,950
Interest Revenue 390
*$78,000 × 6% × 1/2
May 1 Cash* 840
Interest Receivable 280
Interest Revenue 560
*$42,000 × 4% × 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.
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.