Question

Problem 17-07

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The following information relates to the debt securities investments of Vaughn Company.

1.		On February 1, the company purchased 11% bonds of Gibbons Co. having a par value of $316,800 at 100 plus accrued interest. Interest is payable April 1 and October 1.
2.		On April 1, semiannual interest is received.
3.		On July 1, 9% bonds of Sampson, Inc. were purchased. These bonds with a par value of $212,400 were purchased at 100 plus accrued interest. Interest dates are June 1 and December 1.
4.		On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 98 plus accrued interest.
5.		On October 1, semiannual interest is received.
6.		On December 1, semiannual interest is received.
7.		On December 31, the fair value of the bonds purchased February 1 and July 1 are 94 and 92, respectively.

(a)

Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are available-for-sale securities. (Note to instructor: Some students may debit Interest Receivable at date of purchase instead of Interest Revenue. This procedure is correct, assuming that when the cash is received for the interest, an appropriate credit to Interest Receivable is recorded.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Date	Account Titles and Explanation	Debit	Credit
(1)	Feb. 1
(2)	Feb. 1Apr. 1Jul. 1Sep 1Oct. 1Dec. 1Dec. 31
(3)	Jul. 1
(4)	Sep. 1
(5)	Feb. 1Apr. 1Jul. 1Sep 1Oct. 1Dec. 1Dec. 31
(6)	Feb. 1Apr. 1Jul. 1Sep 1Oct. 1Dec. 1Dec. 31
(7)	Feb. 1Apr. 1Jul. 1Sep 1Oct. 1Dec. 1Dec. 31
		(To record interest.)
		(To record adjustment.)

SHOW LIST OF ACCOUNTS

Answer 1

Solution:-

No.	Date	Account Titles and Explanation	Debit	Credit
(1)	Feb. 1	Debt Investment	316,800
		Interest Revenue	11,616
		Cash		328,416

Explanation:-

Interest Revenue = (4/12 x 0.11 x $316,800)

= 11,616

No.	Date	Account Titles and Explanation	Debit	Credit
2	Apr. 1	Cash	17,424
		Interest Revenue		14,424

Explanation:-

Interest Revenue = ($316,800 x 0.11 x 6/12)

= 17,424

No.	Date	Account Titles and Explanation	Debit	Credit
3	July 1	Debt Investment	212,400
		Interest Revenue	1,593
		Cash		213,993

Explanation:-

Interest Revenue = (1/12 x 0.09 x $212,400)

= 1,593

No.	Date	Account Titles and Explanation	Debit	Credit
4	Sep. 1	Cash	61,550
		Loss on sale of Investment	1,200
		Debt Investment		60,000
		Interest Revenue		2,750

Explanation:-

Cash= [($60,000 x 98%) + ($60,000 x 0.11 x 5/12)]

= 61,550

Interest Revenue = 5/12 x 0.11 x $60,000

= 2,750

No.	Date	Account Titles and Explanation	Debit	Credit
5	Oct. 1	Cash	14,124
		Interest Revenue		14,124

Explanation:-

Cash= [($316,800 – $60,000) x 0.11 x 6/12]

No.	Date	Account Titles and Explanation	Debit	Credit
6	Dec. 1	Cash	9,558
		Interest Revenue		9,558

Explanation:-

Cash= ($212,400 x 9% x 6/12)

No.	Date	Account Titles and Explanation	Debit	Credit
7	Dec. 31	Interest Receivable	8,655
		Interest Revenue		8,655
		(To record Interest)

Explanation:-

Interest Revenue = (3/12 x $256,800 x 0.11) + (1/12 x $212,400 x 0.09)

= 8,655

No.	Date	Account Titles and Explanation	Debit	Credit
7	Dec. 31	Unrealized Holding	32,400
		Fair Value Adjustment		32,400
		(To record Adjustment)

Explanation:-

Available-For-Sale-Portfolio
Security	Cost	Fair Value	Unrealized Gain (Loss)
Gibbons Co.	256,800	256,800 * 094 = 241,392	(15,408)
Sampson, Inc.	212,400	212,400 * 0.92 = 195,408	(16,992)
Total	469,200	436,800	32,400

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