Question

Exercise 12-12 (Algo) Available-for-sale securities [LO12-1, 12-4]

Colah Company purchased $1,700,000 of Jackson, Inc., 5% bonds at par on July 1, 2021, with interest paid semi-annually. Colah determined that it should account for the bonds as an available-for-sale investment. At December 31, 2021, the Jackson bonds had a fair value of $1,970,000. Colah sold the Jackson bonds on July 1, 2022 for $1,530,000.

Required:
1. Prepare Colah’s journal entries for the following transactions:

1. The purchase of the Jackson bonds on July 1.
2. Interest revenue for the last half of 2021.
3. Any year-end 2021 adjusting entries.
4. Interest revenue for the first half of 2022.
5. Any entries necessary upon sale of the Jackson bonds on July 1, 2022, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale.

2. Complete the following table to show the effect of the Jackson bonds on Colah’s net income, other comprehensive income, and comprehensive income for 2021, 2022, and cumulatively over 2021 and 2022.

Answer 1

SOLUTION:

1. Colah’s journal entries

DATE	PARTICULARS	DEBIT	CREDIT
July 1, 2021	Investment in Bonds	1,700,000
	To Cash		1,700,000
Dec 31, 2021	Cash (1,700,000*5% / 2)	42,500
	To Interest Revenue		42,500
Dec 31, 2021	Fair Value Adjustment (1,970,000 - 1,700,000)	270,000
	To Unrealized Holding gain-OCI		270,000
June 30, 2022	Cash (1,700,000*5% / 2)	42,500
	To Interest Revenue		42,500
July 1, 2022	Unrealized Holding loss-OCI (1,970,000 - 1,530,000)	440,000
	To Fair Value Adjustment		440,000
July 1, 2022	Fair Value Adjustment (440,000 - 270,000)	170,000
	To Reclassification adjustment-OCI		170,000
July 1, 2022	Cash	1,530,000
	Loss-NI	170,000
	To Investment in Bonds		1,700,000

2. Complete the following table to show the effect of the Jackson bonds on Colah’s net income, other comprehensive income, and comprehensive income for 2021, 2022, and cumulatively over 2021 and 2022.

	2021	2022	Total
Net Income (NI)	42,500	(127,500)	(85,000)
Other Comprehensive Income (OCI)	270,000	(270,000)	-
Comprehensive Income	312,500	(397,500)	(85,000)