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Marigold Company purchased, on January 1, 2017, as an available-for-sale security, $88,000 of the 12%, 5-year...

Marigold Company purchased, on January 1, 2017, as an available-for-sale security, $88,000 of the 12%, 5-year bonds of Chester Corporation for $81,958, which provides an 14% return. Prepare Marigold’s journal entries for (a) the purchase of the investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of $83,600. (

Expert Solution

Date

General Journal

Debit

Credit

1-Jan-17

Debt Investment - Available for sale

$81,958

Cash

$81,958

31-Dec-17

Cash (88,000*12%)

$10,560

Debt investments - available for sale

$914

Interest revenue (81,958*14%)

$11,474

31-Dec-17

Securities fair value adjustment (AFS)

$728

Unrealized holding gain or loss

$728

(83600-(81958+914)

Explanation a) The purchase of bond is investment for the company and hence it is debited, since the company will have to make cash payment which will reduce the cash balance and hence is credited

b) The coupon payment will increase the cash balance and hence is debited, the interest is revenue for the company and hence is credited. The amortization of discount would increase the value of investment and hence is debited

c) The fair value of the bonds are higher than the book value and so company would have unrealized gain and hence unrealized gain is credited.

jeff jeffy answered 1 year ago

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