Question

At December 31, 2020, the investments in the portfolio of the trading securities of Mac Company included the following:

Atlanta Corp. bonds, 5%, $100,000 face value, purchased on Oct. 1, 2020 at par

Dallas Inc. bonds, 4%, $50,000 face value, purchased on July 1, 2020 at par

Required:

1. Record the receipt of quarterly interest from the Atlanta Corp. bonds on December 31, 2020.
2. Record the receipt of semiannual interest from the Dallas Inc. bonds on December 31, 2020.
3. Record the entry to adjust the bonds to fair value on December 31, 2020. The fair value of the Atlanta Corp. bonds and the Dallas In bonds on December 31, 2020, were $110,000 and $45,000 respectively.
4. Record the entry to sell the Atlanta Corporation bonds on January 2, 2021, for $112,500.
5. Record the entry to sell the Dallas Inc. bonds on January 3, 2021 for $44,500.
6. Adjust the Fair Value Adjustment account on December 31, 2021 to reflect that no trading securities are owned (if necessary).

7. Assume INSTEAD that the above bonds are held as available-for-sale investments. if we assume the bonds are AFS Securities, not Trading Securities. if the accounting for the transaction should change, write the complete corrected journal entry.

Answer 1

Question	Date	Description	Debit	Credit
a	Dec 31,2020	Cash Account	$       1,250.00
		Interest Income		$       1,250.00
		[100,000*5%*3/12 = 1,250]
b	Dec 31,2020	Cash Account	$       1,000.00
		Interest Income		$       1,000.00
		[50,000*4%*6/12 = 1,000]
c	Dec 31,2020	Valuation allowance	$       5,000.00
		Unrealized gain on trading securities		$       5,000.00
		[(110,000 - 100,000) + (45,000 - 50,000)]
		=[10,000 -5,000 ] = 5,000
d	Jan 02,2020	Cash Account	$ 1,12,500.00
		Atlanta Corporation Bonds		$ 1,00,000.00
		Gain on sale of Investment		$     12,500.00
		[sold for 112,500]
e	Jan 03,2020	Cash Account	$     44,500.00
		Loss on sale of Investment	$       5,500.00
		Dallas Inc Bonds		$     50,000.00
		[sold for 44,500]
f	Dec 31,2021	Unrealized gain on trading securities	$       5,000.00
		Valuation allowance		$       5,000.00
		[Reversal of investment revaluation entry]

g. Assume INSTEAD that the above bonds are held as available-for-sale investments. if we assume the bonds are AFS Securities, not Trading Securities. if the accounting for the transaction should change, write the complete corrected journal entry.
Question	Date	Description	Debit	Credit
a	Dec 31,2020	Cash Account	$       1,250.00
		Interest Income		$       1,250.00
		[100,000*5%*3/12 = 1,250]
b	Dec 31,2020	Cash Account	$       1,000.00
		Interest Income		$       1,000.00
		[50,000*4%*6/12 = 1,000]
c	Dec 31,2020	Available for sale investment	$     10,000.00
		Gain on available-for-sale securities		$     10,000.00
		Loss on available-for-sale securities	$       5,000.00
		Available for sale investment		$       5,000.00
		[(110,000 - 100,000) + (45,000 - 50,000)]
d	Jan 02,2020	Cash Account	$ 1,12,500.00
		Available-for-sale investments		$ 1,10,000.00
		Gain on available-for-sale securities		$       2,500.00
		[sold for 112,500]
e	Jan 03,2020	Cash Account	$     44,500.00
		Loss on available-for-sale securities	$           500.00
		Available-for-sale investments		$     45,000.00
		[sold for 44,500]