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:

  1. Prepare the adjusting entry for the Fair Value Adjustment account for 2019 to record the investment at its fair value.
  1. 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.


Related Solutions

LED Corporation owns $1,100,000 of Branch Pharmaceuticals bonds and classifies its investment as securities available-for-sale. The...
LED Corporation owns $1,100,000 of Branch Pharmaceuticals bonds and classifies its investment as securities available-for-sale. The market price of Branch’s bonds fell by $385,000, due to concerns about one of the company’s principal drugs. The concerns were justified when the FDA banned the drug. $121,000 of that decline in value already had been included in OCI as a temporary unrealized loss in a prior period. LED views $170,000 of the $385,000 loss as related to credit losses, and the other...
Q18 Neuman classifies its investment in bonds as available-for-sale investment. The investment was purchased at a...
Q18 Neuman classifies its investment in bonds as available-for-sale investment. The investment was purchased at a discount. Which of the following associated account balance(s) must reach zero by the maturity date? Multiple Choice Discount on Bonds Payable, OCI-unrealized gain or loss Discount on Bonds Payable, fair value adjustment, OCI-unrealized gain or loss Discount on Bonds Payable Discount on Bonds Payable, fair value adjustment
At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt...
At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt securities (all of which were acquired at par value): 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 $50,000. July 1 Sold all of the A securities for $25,000 plus interest of $1,000. Dec. 31 Received interest of $7,600 on the B...
At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt...
At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt securities (all of which were acquired at par value): 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 $50,000. July 1 Sold all of the A securities for $25,000 plus interest of $1,000. Dec. 31 Received interest of $7,600 on the B...
At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt...
At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt securities (all of which were acquired at par value): Security Cost 1/1/18 Fair Value A $45,000 $56,000 B 68,000 65,000 Totals $113,000 $121,000 During 2018, the following transactions occurred: May 3 Purchased C debt securities at their par value for $50,000. July 1 Sold all of the A securities for $56,000 plus interest of $1,000. Dec. 31 Received interest of $1,000 on the B...
At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt...
At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt securities (all of which were acquired at par value): 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 $50,000. July 1 Sold all of the A securities for $25,000 plus interest of $1,000. Dec. 31 Received interest of $7,600 on the B...
At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt...
At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt securities (all of which were acquired at par value): 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 $50,000. July 1 Sold all of the A securities for $25,000 plus interest of $1,000. Dec. 31 Received interest of $7,600 on the B...
At the end of 2018, Terry Company prepared the following schedule of investments in available-for-sale debt...
At the end of 2018, Terry Company prepared the following schedule of investments in available-for-sale debt securities: Company Amortized Cost 12/31/18 Fair Value Cumulative Change in Fair Value Morgan Company $30,000 $29,200 $(800) Nance Company 50,000 53,200 3,200 Totals $80,000 $82,400 $2,400 During 2019, the following transactions occurred: July 1 Purchased Oscar Company debt securities with a par value of 100,000 for $98,000. The securities carry an annual interest rate of 10%, mature on July 1, 2024, and pay interest...
Debt Investment Transactions, Available-for-Sale Valuation Rekya Mart Inc. is a general merchandise retail company that began...
Debt Investment Transactions, Available-for-Sale Valuation Rekya Mart Inc. is a general merchandise retail company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Rekya Mart Inc., which has a fiscal year ending on December 31: Year 1 Apr. 1. Purchased $42,000 of Smoke Bay 5%, 10-year bonds at their face amount plus accrued interest of $350. The bonds pay interest semiannually on February 1 and August 1. May 16. Purchased $98,000 of...
Debt Investment Transactions, Available-for-Sale Valuation Rekya Mart Inc. is a general merchandise retail company that began...
Debt Investment Transactions, Available-for-Sale Valuation Rekya Mart Inc. is a general merchandise retail company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Rekya Mart Inc., which has a fiscal year ending on December 31: Year 1 Apr. 1. Purchased $60,000 of Smoke Bay 7%, 10-year bonds at their face amount plus accrued interest of $700. The bonds pay interest semiannually on February 1 and August 1. May 16. Purchased $132,000 of...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT