Question

Debt Investment Transactions, Available-for-Sale Valuation

Rekya Mart Inc. is a general merchandise retail company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Rekya Mart Inc., which has a fiscal year ending on December 31:

Year 1
Apr. 1.	Purchased $48,000 of Smoke Bay 7%, 10-year bonds at their face amount plus accrued interest of $560. The bonds pay interest semiannually on February 1 and August 1.
May 16.	Purchased $108,000 of Geotherma Co. 6%, 12-year bonds at their face amount plus accrued interest of $270. The bonds pay interest semiannually on May 1 and November 1.
Aug. 1.	Received semiannual interest on the Smoke Bay bonds.
Sept. 1.	Sold $19,200 of Smoke Bay bonds at 103 plus accrued interest of $112.
Nov. 1.	Received semiannual interest on the Geotherma Co. bonds.
Dec. 31	Accrued $672 interest on Smoke Bay bonds.
Dec. 31	Accrued $540 interest on Geotherma Co. bonds.
Year 2
Feb. 1.	Received semiannual interest on the Smoke Bay bonds.
May 1.	Received semiannual interest on the Geotherma Co. bonds.

Required:

1. Journalize the entries to record these transactions. For a compound transaction, if an amount box does not require an entry, leave it blank.

Date	Description	Debit	Credit
Year 1
Apr. 1.
May 16.
Aug. 1.
Sept. 1.
Nov. 1.
Dec. 31 Smoke Bay
Dec. 31 Geotherma Co.
Year 2
Feb. 1.
May 1.

2. If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure?

If the bonds are classified as available-for-sale securities, then the portfolio of bonds would need to be adjusted to  . This would be accomplished by using a valuation allowance account and   account.

Answer 1

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2.

If the bonds are classified for sale securrities,then the portfolio of bonds would need to be adjusted to fair value.This would be accomplished by using a valuation allowance account and an unrealized gain(loss) account.If the fair value were greater than the cost of bond portfolio,the two accounts would be positive ,thus added to investments and stockholders equity,respectively.If the fair value were less than the cost of the bond portfolio the two accounts would be negative and thus substracted from investments and stockholders equity respectively.