Question
In: Finance
Majestic Company owns the following debt investment which management properly classifies as available for sale: &nbs
Majestic Company owns the following debt investment which management properly classifies as available for sale:
Amortized Cost Fair Value at 12/31/19
Ajax Company Bond $1,670,000 $1,710,000
Majestic is preparing its adjusting entries for 2019 to record the Ajax Bond at its fair value. At the end of 2018, the bond had an amortized cost of $1,700,000 and a fair value of $1,680,000 leaving a credit balance in the Fair Value Adjustment account of $20,000. (SHOW ALL WORK)
Required:
- Prepare the adjusting entry for the Fair Value Adjustment account for 2019 to record the investment at its fair value.
- The Treasurer for Majestic advises you that he plans to purchase a bond issued for Dolly Company in 2020. He indicates that the bond will mature in 2028 and the company will hold it to its maturity unless the company decides to upgrade its Cincinnati plant in 2021 in which case the bond will be sold because the company will need to use the sales proceeds for the plant expansion. Based on the above, advise the Chief Accountant whether this investment should be classified as trading, available for sale, or holding.
Solutions
Expert Solution
Available for sale securities are reported on balance sheet at fair value. Any unrealized gain and losses are not recognized in the income statement but are reported in other comprehensive income as part of shareholders equity.
Majestic company will show its debt investment at fair value of $1,710,000 in 2019 and unrealized gain of $30,000 (1710000-1680000) in other comprehensive income as part of shareholders equity.
$1680000 was fair value company reported in 2018 so difference between 2018 and 2019 will be part of other comprehensive income as unrealized gain.
Initially company can claasify its investment in Dolly company as Available for sale as they might sell in 2021 and if they are not selling that security in 2021 then they can reclassify that from Available for sale to Held to maturity.
In that case the cumulative amount of gains or losses previously reported in other comprehensive income will be amortized over the remaining life of the security as an adjustment of yield (interest income) in the same manner as a premium or discount.
jeff jeffy answered 2 years agoRelated Solutions
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Security
Cost
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A
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$25,000
B
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29,000
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Security
Cost
1/1/2018 Fair Value
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B
30,000
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Totals
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During 2018, the following transactions occurred:
May 3
Purchased C debt securities at their par value for
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Sold all of the A securities for $25,000 plus interest of
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Received interest of $7,600 on the B...
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Security
Cost
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A
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$56,000
B
68,000
65,000
Totals
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Security
Cost
1/1/2018 Fair Value
A
$20,000
$25,000
B
30,000
29,000
Totals
$50,000
$54,000
During 2018, the following transactions occurred:
May 3
Purchased C debt securities at their par value for
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July 1
Sold all of the A securities for $25,000 plus interest of
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53,200
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