Question

Required: Prepare the journal entries necessary to record the above information on ABC company’s books during 2018.

In 2018, ABC company engaged in the following investment:

Jan1 Purchased $160,000 of 6% bonds for $168,300 (a 5% effective interest rate) as a non-trading investment. Interest is paid on May 1 and January 1 and the bonds mature on January 1, 2023.

Jan1 Purchased 25% of the outstanding ordinary shares of Super star for $210,000 cash. On that date, Super's book value and fair value were both $840,000. The equity method is deemed appropriate for this investment.

Nov1 The bonds are sold at 105 plus accrued interest.

Dec 31 Super’s net income reported on December 31, 2018, was $80,000. During 2018, Super also paid cash dividends in the amount of $24,000.

Answer 1

	Journal Entries in the books of ABC books
		Debit($)	Credit($)
01/01/2018	6% Bonds A/c Dr	168,300
	To Cash A/c		168,300
	(Being Invested in 6% Bonds)
01/01/2018	Investment in Equity A/c Dr	210,000
	To Cash A/c		210,000
	(Being Invested in Equity recorded)
	Interest Accrual Entry on 01/05/2018
01/05/2018	Cash A/c Dr	3,200
	To Interest		2,805
	(168300*5%*4/12)
	Debt Investments		395
	(Being Interest accrual recorded)
01/11/2018	Interest Receivable		4,800
	(160000*6%*6/12)
	Interest Revenue		4,198
	(168300-395)*5%*6/12)
	To Debt Investments		602
	(Being Interest accrual recorded)
01/11/2018	Cash A/c Dr	172,800
	(160000*1.05)+4800
	Gain on sale on investments		697
	Debt Investments		167,303
	(168300-395-602)
	Interest Receivable		4,800
	(Being Sale of Bonds)
31/12/2018	Cash A/c Dr	6,000
	To Dividend		6,000
	(24000*25%)
	(Being Dividend Received)