Question

The following information pertains to Lynx Corporation’s portfolio of marketable securities for the years ended December 31, Year 1, and December 31, Year 2:

	Cost	Fair Value (12/31/Y1)	Activity Y2	Fair Value (12/31/Y2)
Held-to-Maturity Debt Securities
Bond A	90,000	92,000	Received 3,000 interest	93,500
Available-for-sale Debt Securities
Bond B	100,000	101,750	Sold at 103,000	102,100
Marketable Equity Securities (lacks significant impact)
Stock C	75,000	68,000		73,000
Stock D	45,000	51,000	Sold at 49,500	53,500

Additional Notes:

•	Bond A is an 8-year bond paying 3% annually; face value $100,000, issued at a market yield of 4.5%.
	It was bought on 1/1/Y1.
•	Bond B is a 10-year bond paying 3.5% and was purchased at face value ($100,000) It was sold on 1/2/Y2. The interest accrued in Y2 is immaterial.

Required:

1. Compute the carrying value of each security on the company’s balance sheet for both Year 1 and Year 2:

	Year 1	Year 2
Bond A
Bond B
Stock C
Stock D

2. Provide the journal entries for each security for activity in Year 2:

Answer 1

Carrying value working-
	Cost	Addition	Deletion	Fair value gain/ (loss)	Interest	Carrying value at Y1	Addition	Deletion	Cash received	Fair value gain/ (loss)	Interest	Carrying value at Y2
Bond A	90,000	-	-	(1,000)	3,000	92,000	-	-	(3,000)	1,500	3,000	93,500
Bond B	100,000	-	-	(1,750)	3,500	101,750	-	(101,750)				-
Stock C	75,000	-	-	(7,000)	-	68,000	-	-	-	5,000	-	73,000
Stock D	45,000	-	-	6,000	-	51,000		(51,000)				-
				(3,750)						6,500

Journal entry-
Date	General Ledger	Debit	Credit
Y1	Bond A----Dr	3,000
	Bond B---Dr	3,500
	To Interest income A/c		6,500
Y1	Fair value Loss A/c---Dr	3,750
	Stock D A/c---Dr	6,000
	To Bond A A/c		1,000
	To Bond B A/c		1,750
	To Stock C A/c		7,000
Y2	Cash A/c---Dr	3,000
	To Bond A A/c-		3,000
Y2	Cash A/c---Dr	103,000
	To Bond B A/c		101,750
	To gain on sale A/c		1,250
Y2	Cash A/c---Dr	49,500
	Loss on Sale A/c---DR	1,500
	To Stock D A/c		51,000
Y2	Bond A A/c--Dr	3,000
	To Interest Income A/c		3,000
Y2	Bond A A/C---Dr	1,500
	Stock C A/c---Dr	5,000
	To Fair value gain		6,500