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In: Accounting

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

On December 31, 2018, M Company held X Company bonds in its portfolio of available-for-sale securities. The bonds have a par value of $15,000, 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 $13,000. The December 31, 2018, balance sheet showed the following:

M Company

Partial Balance Sheet

December 31, 2018

1

Assets

2

Investment in Available-for-Sale Securities

$15,000.00

3

Less: Allowance for Change in Fair Value of Investment

(2,000.00)

4

$13,000.00

5

Shareholders’ Equity:

6

Unrealized Holding Gain/Loss

$(2,000.00)

On January 1, 2019, M acquired bonds of Y Company with a par value of $16,000 for $16,200. The Y Company bonds carry an annual interest rate of 12% and mature on December 31, 2023. Additionally, M acquired Z Company bonds with a face value of 18,000 for $17,600. The Z 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: X, $14,000; Y, $17,000; and Z, $20,000. M 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 M 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 on January 1, 2019, the annual interest payments on December 31, 2019, and the adjusting entry needed on December 31, 2019.
2. What would M disclose on its December 31, 2019, balance sheet related to these investments?
CHART OF ACCOUNTS
M Company
General Ledger
ASSETS
111 Cash
114 Investment in Available-for-Sale Securities
119 Allowance for Change in Fair Value of Investment
121 Accounts Receivable
141 Inventory
152 Prepaid Insurance
181 Equipment
189 Accumulated Depreciation
LIABILITIES
211 Accounts Payable
231 Salaries Payable
250 Unearned Revenue
261 Income Taxes Payable
EQUITY
311 Common Stock
331 Retained Earnings
391 Unrealized Holding Gain/Loss: Available-for-Sale Securities
REVENUE
411 Sales Revenue
431 Interest Income
EXPENSES
500 Cost of Goods Sold
511 Insurance Expense
512 Utilities Expense
521 Salaries Expense
532 Bad Debt Expense
540 Interest Expense
541 Depreciation Expense
559 Miscellaneous Expenses
910 Income Tax Expense

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