Question

1.The following information relates to the debt investments of Black Elk Petroleum Company:

On February 1, the company purchased 10% bonds of Gerber Co. having a par value of $300,000 at 100 plus accrued interest. Interest is payable April 1 and October 1.

On April 1, semiannual interest is received.

On July 1, 9% bonds of Target, Inc. were purchased. The bonds have a par value of $200,000 and were purchased at 100 plus accrued interest. Interest dates are June 1 and December 1.

On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.

On October 1, semiannual interest is received.

On December 1, semiannual interest is received.

On December 31, the fair value of the bonds purchased February 1 and July 1 are 95 and 93, respectively.

INSTRUCTIONS:

Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are available-for-sale securities.

If Black Elk classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (1).

2.Flourish & Botts, Inc. has the following portfolio of investment securities at September 30, 2017, its most recent reporting date

Investments Cost Fair Value Unrealized Gain(Loss)

Gambol & Japes 5,000 Shares $215,000 $200,000 $(15,000)

Borgin & Burks 3,500 Shares $133,000 $140,000 $7,000

Knockturn Alley 1,000 Shares $180,000 $179,000 $(1,000)

On October 10, 2017, the Gambol & Japes shares were sold at a price of $54/share. In addition, 3,000 shares of Eeylops Owl Emporium common stock were acquired for $54.50/share on November 2, 2017. The December 31, 2017, fair values were Borgin & Burks $106,000, Eeylops Owl Emporium $132,000, and Knockturn Alley $193,000.

Instructions:

Prepare the journal entries to record the sale, purchase, and adjusting entries related to the equity securities in the last quarter of 2017.

For the fair value adjustment related to the LAST quarter of 2017, create a schedule as the one shown above.

NOTE: There should be three entries – one for each of the highlighted dates. When you calculate the fair value adjustment as of December 31, 2017, remember to take into account the fair value adjustment that would have been recorded on September 30, 2017.

Answer 1

Journal entries:

Date	Accounts title	Debit	Credit
1-Feb	Debt investments ( 10% bonds of Gerber Co.)	300,000
	Cash		300,000
1-Apr	Cash (300,000*10%*2/12)	5,000
	Interest received		5,000
1-Jul	Debt investments (9% bonds of Target, Inc.)	200,000
	Cash		200,000
1-Sep	Cash	59,400
	Loss on sale	600
	Debt investments ( 10% bonds of Gerber Co.)		60,000
1-Oct	Cash ((300,000-60,000)*10%*7/12)	14,000
	Interest received		14,000
1-Dec	Cash (200,000*9%*5/12)	7,500
	Interest received		7,500
31-Dec	Unrealized loss	26000
	Debt investments ( 10% bonds of Gerber Co., 240,000/100= 2,400*(100-95))		12,000
	Debt investments (9% bonds of Target, Inc., 200,000/100= 2,000*(100-93))		14,000

If Black Elk classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (1).

Here the above entries are classified as Available for sale and thus we have calculated on the fair value of the investment at the end of the year but if they are classified as held to maturity than that would be calculated at cost of the investment at the end of the year.

2. Journal entries:

Date	Accounts title	Debit	Credit
10-Oct	Cash (5,000shares*$54)	270000
	Gain on sale of stock		55,000
	Trading securities		215,000
2-Nov	Trading securities (3,000*$54.50)	163500
	Cash		163,500
	Adjustment entry (note)
31-Dec	Unrealized holding loss	36,500
	Fair value adjustment (trading)		36,500

Note:
At December 31, 2017, following fair value adjustment:
Securities                 Cost      FairValue         UnrealizedGain (Loss)
Eeylops Owl Emporium       $163,500     $132,000                     $(31,500)

Borgin & Burks                     $133,000     $106,000                    $(27,000)

Knockturn Alley                    $180,000     $193,000                    $13,000
Total of portfolio                                                                          $(45,400)
Less:
Previous securities fair value adjustment balance( -15,000+7,000-1,000)              = (9,000)
Securities fair value adjustment = $(36,500)