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In: Accounting

On December 31, 2018, Marsh Company held Xenon Company bonds in its portfolio of available-for-sale securities....

On December 31, 2018, Marsh Company held Xenon Company bonds in its portfolio of available-for-sale securities. The bonds have a par value of $14,000, carry a 10% annual interest rate, mature in 2025, and had originally been purchased at par. The market value of the bonds at December 31, 2018 was $12,000. The December 31, 2018, balance sheet showed the following:

Marsh Company

Partial Balance Sheet

December 31, 2018

1

Assets

2

Investment in Available-for-Sale Securities

$14,000.00

3

Less: Allowance for Change in Fair Value of Investment

(2,000.00)

4

12,000.00

5

Shareholders’ Equity:

6

Unrealized Holding Gain/Loss

$(2,000.00)

On January 1, 2019, Marsh acquired bonds of Yellow Company with a par value of $16,000 for $16,200. The Yellow Company bonds carry an annual interest rate of 12% and mature on December 31, 2023. Additionally, Marsh acquired Zebra Company bonds with a face value of 18,000 for $17,600. The Zebra Company bonds carry an 8% annual interest rate and mature on December 31, 2028. At the end of 2019, the respective market values of the bonds were: Xenon, $13,000; Yellow, $17,000; and Zebra, $20,000. Marsh classifies all of the debt securities as available-for-sale as it does not intend to hold them to maturity nor does it intend to actively buy and sell them. Assume that Marsh uses the straight-line method to amortize any discounts or premiums.

Required:

1. Prepare the journal entries necessary to record the purchase of the investments in 2019, the annual interest payments on December 31, 2019, and the adjusting entry needed on December 31, 2019.
2. What would Marsh disclose on its December 31, 2019, balance sheet related to these investments?

Solutions

Expert Solution

Requirement 1
Date General Journal Debit Credit
Amount in $
December 31, 2019 Investment in Bonds of yellow Company(AFS) 16200
Cash 16200
To record the investment in bonds
December 31, 2019 Investment in bonds of Zebra Company(AFS) 17600
Cash 17600
To record the investment in bonds
December 31, 2019 Cash 1400 =14000*10%
Interest received-Xenon company 1400
To record the Interest income
December 31, 2019 Cash 1920 =16000*12%
Interest received-Yellow company 1920
To record the Interest income
December 31, 2019 Cash 1440 =18000*8%
Interest received-Zebra company 1440
To record the Interest income
December 31, 2019 Investment in bonds of Zebra Company(AFS) 2400 =20000-17600
Investment in Bonds of yellow Company(AFS) 800 =17000-16200
Investment in Bonds of Xenon CompanY(AFS) 1000 =13000-12000
Unrealized Holding gain(OCI) 4200
To record the fair value adjustment
Requirement 2
Marsh Company
Partial balance sheet
December 31, 2019
Asset
Investment in Bonds of Xenon CompanY(AFS) 14000
Less : Change in fair value adjustment 1000 13000
Investment in Bonds of yellow Company(AFS) 16200
Add : Change in fair value adjustment 800 17000
Investment in bonds of Zebra Company(AFS) 17600
Add : Change in fair value adjustment 2400 20000
Shareholder's equity
Unrealized holding gain/loss 2200 =-2000+4200

ekkarill92 answered 1 year ago
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