Question

Problem 17-7 The following information relates to the debt securities investments of Ivanhoe Company. 1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of $313,200 at 100 plus accrued interest. Interest is payable April 1 and October 1. 2. On April 1, semiannual interest is received. 3. On July 1, 9% bonds of Sampson, Inc. were purchased.

These bonds with a par value of $216,000 were purchased at 100 plus accrued interest. Interest dates are June 1 and December 1. 4. On September 1, bonds with a par value of $54,000, purchased on February 1, are sold at 98 plus accrued interest. 5. On October 1, semiannual interest is received. 6. On December 1, semiannual interest is received. 7. On December 31, the fair value of the bonds purchased February 1 and July 1 are 94 and 92, respectively.

(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are available-for-sale securities

Answer 1

(a)                                                     February 1

        Debt Investments (available-for-sale)....................      313,200

        Interest Revenue (4/12 X .10 X $313,200)..............      10,440

                Cash.....................................................................                         323,640

                                                             April 1

        Cash.............................................................................      15,660

                Interest Revenue ($313,200 X .10 X 6/12)......                         15,660

                                                              July 1

        Debt Investments (available-for-sale)....................      216,000

        Interest Revenue (1/12 X .09 X $216,000)..............          1,620

                Cash.....................................................................                         217,620

                                                        September 1

        Cash [($54,000 X 98%) + ($54,000 X .10 X 5/12)]..        55,170

        Loss on Sale of Investments ..................................          1,080

                Debt Investments (available-for-sale)............                           54,000

                Interest Revenue

                    (5/12 X .10 X $54,000 = $2,250)....................                              2,250

                                                          October 1

        Cash [($313,200 – $54,000) X .10 X 6/12]...............      12,960

                Interest Revenue................................................                         12,960

                                                        December 1

        Cash ($216,000 X 9% X 6/12)...................................          9,720

                Interest Revenue................................................                              9,720

                                                       December 31

        Interest Receivable...................................................          8,100

                Interest Revenue...............................................                               8,100

                    (3/12 X $259,200 X .10 = $6,480)

                    (1/12 X $216,000 X .09 = $1,620)

                    ($6,480 + $1,620 = $8,100)

                                                       December 31

        Unrealized Holding Gain or Loss—Equity...........         32,832

                Fair Value Adjustment (available-for-sale)...                             32,832

Available-for-Sale Portfolio

Security	Cost	Fair Value	Unrealized Gain (Loss)
Gibbons Co.	$259,200	$243,648*	$(15,552)
Sampson, Inc.	216,000	198,720**	(17,280)
Total	$475,200	$442,368	$(32,832)

         *$259,200 X 94%

        **$216,000 X 92%