Question

The following transactions for Wolfe Corporation relate to long-term bonds classified as available-for-sale:

2018

Jan. 1 Purchased $50,000 Lake Corporation 10% bonds for $50,000.

July 1 Received interest on Lake bonds.

Dec. 31 Accrued interest on Lake bonds.

Dec. 31 Market value of the bonds $55,000, prepare the adjusting entry to record bonds at market value.

2019

Jan. 1 Received interest on Lake bonds.

Jan. 1 Sold $25,000 Lake bonds for $26,650.

July 1 Received interest on Lake bonds.

a) Journalize the transactions.

Answer 1

Journal Entries-2018

Date	General Journal	Debit	Credit
Jan 1	Investment in 10 %Lake corporation	$50,000
	Cash		$50,000
	10 % Bonds purchased
July 1	Cash	$ 2,500
	Interest revenue		$ 2,500
	(Interest is received on july 1 on bonds purchased
Dec 31	Interest revenue Receivable	$ 2,500
	Interest revenue		$ 2,500
	Interest accrued on bond purchased
Dec 31	Investment in 10% Lake corporation	$ 5,000
	Gain on Bonds held for sale-(ther comprehensive income)		$ 5,000
	Investment in bonds is recorded at market value

Journal entries-2019

Date	General Journal	Debit	Credit
Jan 1	Cash	$ 2,500
	Interest Revenue Receivable		$2,500
	Interest accrued received
Jan 1	Gain on bonds held for sale ( other comprehensive income)	$850
	Investment in 10% lake corporation bonds		$ 850
	Investment brought to sale value
Jan 1	Cash	$26,650
	Investment in 10% lake corporation bonds		$26,650
	Cash received on sale of bonds

July 1	Cash	$ 1,250
	Interest Revenue		$1,250
	Interest received on remaining bonds

Working notes-

Bonds classified as held for sale are recorded using cost method, where any interest is recorded as income and at each balncehseet date investment is recorded at fair value through other comprehensive income.

Year 2018

1.Bonds purchased are recorded as investment on cost

2.Interest received of 10% on 50,000 for 6 months= 50,000*10%*6/12=$ 2,500.Interest is recorded as income.

3.Interest is accrued on dec31 for 6 months =$ 3,500

4. Investment are recorde at market value and any gain on recording at fair value is transferred to OCI (Gain on bonds held for sale)

In year 2019

5.Interest accrued is received in cash so interest revenue receivable account is credited and cash is debited

6. Now on jan  1, assets are sold for $ 26,650 which were originally of $ 27,500.

Now, we should bring the investment at fair value of 26,650

Investment originally of $ 25,000 which are sold, were carried at book vallue of (55,000/2)= 27,500 as on Jan 1

So investment in 10% lake bonds &  gain on investment( recorded earlier) should be reduce by

(27,500-26,650= $ 850)

Cash is received on sale and investment credited at $ 26,650

7.

Interest is received on remaining bonds of $ 25,000 for 6 months

Interest= 25,000*10%*6/12= 1250

Hope it helps!!

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