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 $42,000 of Smoke Bay 5%, 10-year bonds at their face amount plus accrued interest of $350. The bonds pay interest semiannually on February 1 and August 1.
May 16.	Purchased $98,000 of Geotherma Co. 6%, 12-year bonds at their face amount plus accrued interest of $245. The bonds pay interest semiannually on May 1 and November 1.
Aug. 1.	Received semiannual interest on the Smoke Bay bonds.
Sept. 1.	Sold $16,800 of Smoke Bay bonds at 103 plus accrued interest of $70.
Nov. 1.	Received semiannual interest on the Geotherma Co. bonds.
Dec. 31	Accrued $420 interest on Smoke Bay bonds.
Dec. 31	Accrued $490 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.	Investments-Smoke Bay Bonds
	Interest Receivable
	Cash
May 16.	Investments-Geotherma Co. Bonds
	Interest Receivable
	Cash
Aug. 1.	Cash
	Interest Receivable
	Interest Revenue
Sept. 1.	Cash
	Interest Revenue
	Gain on Sale of Investment
	Investments-Smoke Bay Bonds
Nov. 1.	Cash
	Interest Receivable
	Interest Revenue
Dec. 31 Smoke Bay	Interest Receivable
	Interest Revenue
Dec. 31 Geotherma Co.	Interest Receivable
	Interest Revenue
Year 2
Feb. 1.	Cash
	Interest Receivable
	Interest Revenue
May 1.	Cash
	Interest Receivable
	Interest Revenue

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 fair value . This would be accomplished by using a valuation allowance account and an unrealized gain (loss)  account.

Answer 1

		Debit	Credit
Apr. 1.	Investments-Smoke Bay Bonds	42000
	Interest Receivable	175		[42000*2.5%*2/12]
	Cash		42175
May 16.	Investments-Geotherma Co. Bonds	98000
	Interest Receivable	245		[98000*6%*(0.5/12)]
	Cash		98245
Aug. 1.	Cash	525		[42000*2.5%*6/12]
	Interest Receivable		175
	Interest Revenue		350
Sept. 1.	Cash	17374		[16800*1.03]+70
	Interest Revenue		70
	Gain on Sale of Investment		504	[17374-70-16800]
Nov. 1.	Cash	2940		[98000*6%*(6/12)]
	Interest Receivable		245
	Interest Revenue		2695
Dec. 31 Smoke Bay	Interest Receivable	262.5		[(42000-16800)*2.5%*5/12]
	Interest Revenue		262.5
Dec. 31 Geotherma Co.	Interest Receivable	980		[98000*6%*(2/12)]
	Interest Revenue		980
Year 2
Feb. 1.	Cash	315		[(42000-16800)*2.5%*6/12]
	Interest Receivable		262.5
	Interest Revenue		52.5
May 1.	Cash	2940		[98000*6%*(6/12)]
	Interest Receivable		980
	Interest Revenue		1960

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 fair value . This would be accomplished by using a valuation allowance account and an unrealized gain (loss)  account.

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