Question

On May 1, 2018, Delta Airlines buys 100 SkyFlight Food Service, Inc. bonds for $1,015 each. Delta classifies this investment as available for sale. This is the first available for sale investment Delta has recorded and the only item that affects comprehensive income during this time period. During 2018, SkyFlight pays all bondholders $42 interest per bond. At the end of 2018, the bonds of Skyflight are trading for $1,020 each. During 2019, Skyflight pays all bondholders interest of $75 per bond. At the end of 2019, the bonds of Skyflight are trading for $1,014 per bond. On May 1, 2020, Delta Airlines sells all of its Skyflight bonds for $1,010 per bond. No interest was paid by Skyflight in 2020. Net income before anything to do with Skyflight (even the interest is not included) for Delta was $20 million in 2018, $16 million in 2019 and $18 million in 2020 after taxes. The tax rate is 20% for all years.

Requirements:

a. Show all the needed journal entries for the Skyflight stock from purchase to sale.

b. Show the statement of comprehensive income for 2018, 2019 and 2020.

c. If accumulated other comprehensive income is $500,000 at the beginning of 2018, what is the accumulated other comprehensive income at the end of 2018, 2019 and 2020

Answer 1

Answer: a.)

Date	Account Title and Explanation	Debit $	Credit $
May 1 , 2018	Available-for-sale securities (100 bond x $1015)	1,015,000
	Cash		1,015,000
	(To record entry for purchase of securities)
2018	Cash	4,200
	Interest on Bond (100 bond x $42)		4,200
	(To record Interest on bond)
2018	Available-for-sale securities (1020-1015)*100	500
	Unrealized gain on available-for-sale securities (1020-1015)*100		500
	(To record Year end fair value of Securities)
2019	Cash	7,500
	Interest on Bond (100 bond x $75 )		7,500
	(To record Interest on bond)
2019	Unrealized loss on available-for-sale securities	600
	Available-for-sale securities (1014-1020)*100		600
	(To record Year end fair value of Securities)
2020	Realized loss on available-for-sale securities	100
	Unrealized loss on available-for-sale securities		100
	(To record Sale of Secutities transfer of unrealized gain / loss to realized)
2020	Cash	101,000
	Realized loss on available-for-sale securities (1010-1014)*100	400
	Available-for-sale securities (1014*100 )		101,400
	(To record Sale of Securities)

b. Statement of comprehensive income

	2018	2019	2020
Investments (or Current Assets):
Available-for-sale securities	102,000	104,000	0
Stockholders’ equity:
Capital stock	-	-	-
Additional paid-in capital	-	-	-
Total paid-in capital	-	-	-
Other Comprehensive income	-	500	(100)
Less: Unrealized loss on available-for-sale securities	-	600	-
Add : Unrealized gain on available-for-sale securities	500	-	100
Total Other Comprehensive income	500	(100)	0
Retained earnings	-	-	-
Total stockholders’ equity	-	-	-

c.)

Partial Balance Sheet	2018	2019	2020
Investments (or Current Assets):
Available-for-sale securities	102,000	104,000	0
Stockholders’ equity:
Capital stock	-	-	-
Additional paid-in capital	-	-	-
Total paid-in capital	-	-	-
Other Comprehensive income	500,000	500,500	499,900
Less: Unrealized loss on available-for-sale securities	-	600	-
Add : Unrealized gain on available-for-sale securities	500	-	100
Total Other Comprehensive income	500,500	499,900	500,000
Retained earnings	20,003,360	16,009,360	18,008,860
Total stockholders’ equity	-	-	-