Question

Prepare all journal entries related to the following investment:

ABC Company purchased $1 million of XYZ Inc. 5% bonds at face value on July 1, 2017, with interest paid semiannually. ABC Company receives interest semiannually on June 30 and December 31, with the first interest payment on December 31, 2017. ABC Company bought the bonds not intending to profit from short-term differences in price in days and not to hold it to maturity.

On December 31, 2017, the fair value of the XYZ Inc. bonds was $1.2 million. ABC sold the XYZ Inc. bonds on January 2, 2018 for $900,000. ABC’s fiscal year ends on December 31.

Answer 1

Date	Account	Debit	Credit
1-Jul-17	Investment in bonds	$     1,000,000
	Cash		$     1,000,000
	(Entry to record purchase of bonds)
31-Dec-17	Cash	$          25,000
	Interest revenue		$          25,000
	(Entry to record semi-annual interest)
	Investment in bonds	$        200,000
	Unrealized gain on available for sale securities - OCI		$        200,000
	(year end fair value adjustment)
2-Jan-18	Cash	$        900,000
	Realized loss on available for sale securities		$        300,000
	Investment in bonds		$     1,200,000
	(entry to record sale of bonds)

Year end adjustment = fair value - book value = $1,200,000 - $1,000,000 = $200,000

Realized loss = carrying value - selling price = $1,200,000 - $900,000 = $300,000.

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