Question

PROBLEM

1

XYZ

Company

acquired as a long

-

term investment $440 million of 8% bonds,

on July 1,

2018

, and

management has the positive intent and

ability to hold the bonds until maturity

(three years, until

June 30

, 2021)

. The market interest rate

was 5% for bonds of similar risk and maturity.

XYZ

paid

$500 million for the bonds;

it

will receive interest semiannually on June 30 and December 31

.

a)

Prepare the journal entry to record

XYZ

’

s

investmen

t in the bonds on July 1, 2018

.

b)

Prepare the journal entries by

XYZ

to record interest on December 31,

2018.

c)

At what amount w

ill

XYZ

report its investment in the December 31,

2018

, balance sheet?

d)

Suppose KP’s bond rating agency upgraded the risk rating of the bonds, and

XYZ

Com

pany

decided to sell the investment

on January

1

, 2019

, for $520 million. Prepare the journal entry

to record the sale.

PROBLEM

2

ABC

Company buys and sells debt securities expecting to earn profits on short

-

term differences in

pri

ce. The company’s fiscal year ends on December 31. The following selected transactions relating

to

ABC

’

s

trading account

s

occurred during December

2017

and the first week of

2018.

2017

Dec.

12

Purchased 50 Simco bonds at par for $175,000

28

Received interest of $1,000 from the Simco bonds

31

Record

ed adjusting ent

ries relating to Simco bonds;

market price was $4,000 per bond

2018

Jan

.

02

Sold the

Simco bonds

for $197,500

a)

Prepare the appropriate journal entry for

each

transaction.

Answer 1

Problem 1			($ in millions)
	Req 1	Account title and explanation	Debit	Credit
		Investment in bonds (face amount)	$             440
		Premium on bond investment (difference)	$               60
		Cash (price of bonds)		$      500
	Req 2	Cash (4% x $440 million)	$          17.60
		Premium on bond investment (difference)		$     5.10
		Interest revenue (2.5% x $500)		$   12.50
	Req 3	XYZ reports its investment in the December 31, 2011, balance sheet at its amortized cost – that is, its book value:
		Investment in bonds	$             440
		Add: Premium on bond investment ($60 – 5.10 million)	54.90
		Amortized cost	494.90
	Req 4		($ in millions)
		Cash (proceeds from sale)	$        520.00
		Premium on bond investment (balance, determined above)		$   54.90
		Gain on sale of investments (to balance)		$   25.10
		Investment in bonds (face amount)		$ 440.00
Note: I have tried my best for correct solution still you need any further help please ask in comment.
Please post a separate question for problem 2 as it’s a different question, Thanks.