Question

The following information relates to the debt securities investments of Larkspur Company.

1.		On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of $309,600 at 100 plus accrued interest. Interest is payable April 1 and October 1.
2.		On April 1, semiannual interest is received.
3.		On July 1, 8% bonds of Sampson, Inc. were purchased. These bonds with a par value of $180,000 were purchased at 100 plus accrued interest. Interest dates are June 1 and December 1.
4.		On September 1, bonds with a par value of $64,800, purchased on February 1, are sold at 98 plus accrued interest.
5.		On October 1, semiannual interest is received.
6.		On December 1, semiannual interest is received.
7.		On December 31, the fair value of the bonds purchased February 1 and July 1 are 94 and 92, respectively.

(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are available-for-sale securities.

Answer 1

Date	Accounts Titles & Explanation	Debit ($)	Credit ($)
February 1	Available for Sale Securities	309,600
	Interest Revenue (4 / 12 * 10 % * $309,600)	10,320
	Cash		319,920
	(To record purchase of bonds at par plus 100 accrued interest.)
April 1	Cash	15,480
	Interest Revenue (6 / 12 * 10 % * $309,600)		15,480
	(To record semiannual interest received.)
July 1	Available for Sale Securities	180,000
	Interest Revenue (1 / 12 * 8 % * $180,000)	1,200
	Cash		181,200
	(To record purchase of bonds at par plus 100 accrued interest.)
September 1	Cash [($64,800 * 98 %) + ($64,800 * 10 % * 5 /12)]	66,204
	Loss on Sales of Securities	1,296
	Available for Sale Securities		64,800
	Interest Revenue ($64,800 * 10 % * 5 /12)		2,700
	(To record sale of securities.)
October 1	Cash	12,240
	Interest Revenue [6 / 12 * 10 % * ($309,600 - $64,800)]		12,240
	(To record semiannual interest received.)
December 1	Cash	7,200
	Interest Revenue [6 / 12 * 8 % * $180,000]		7,200
	(To record semiannual interest received.)
December 31	Interest Receivable	7,320
	Interest Revenue [3 / 12 * 10 % * ($309,600 - $64,800)] + [1 / 12 * 8 % * $180,000]		7,320
	(To record accrued interest)
December 31	Unrealized Holding Gain or Loss - Equity	29,088
	Securities Fair Value Adjustment (Available for Sale Securities) [($309,600 - $64,800) - {($309,600 - $64,800) * 94 %}] + [$180,000 - ($180,000 * 92%)		29,088
	(To record fair value adjustment)