Question

Safety Development Corporation had relatively large idle cash balances and invested them as follows in securities to be held as non-strategic investments:

2020Feb.7Purchased 2,200 common shares of Royal Bank at $26.50, plus $500 in transaction fees.
19 Purchased 1,200 common shares of Imperial Oil at $51.75, and paid $250 in transaction fees.
Apr.1 Paid $88,258 plus $500 in transaction fees for a 6.8%, four-year, $90,000 Minco Inc. bond that pays interest quarterly beginning
June 30. The market rate of interest on this date was 7.2%. Sellers Corporation plans to hold this investment for the duration of the bond’s contract life.
May26 Purchased 2,000 common shares of BCE at $13.38, plus $200 in transaction fees.
June1 Received a $0.25 per share cash dividend on the Royal Bank common shares.17Sold 1,200 Royal Bank common shares at $27.00.30Received interest on the Minco Inc. bond.
Aug.5 Received a $0.50 per share cash dividend on the Imperial Oil common shares.
Sept.1 Received a $0.275 per share cash dividend on the remaining Royal Bank common shares.30Received interest on the Minco Inc. bond.
Dec.31 Received interest on the Minco Inc. bond.

On December 31, 2020, the fair values of the investments held by Safety Development Corporation were: Royal Bank, $27.50; Imperial Oil, $50.13; and BCE, $13.50. Assume the fair value and carrying value of the Minco Inc. bond were equal.

Required:
1. Prepare an amortization schedule for the Minco Inc. bond showing only 2020. (Round your intermediate and final answers to the nearest whole dollar amount. Enter all the amounts as positive values.)

2. Prepare journal entries to record the investment activity including the appropriate fair value adjustment on December 31. (Round your intermediate and final answers to the nearest whole dollar amount.)

3. Show how the investments will be reported on the December 31, 2020, balance sheet. (Round your intermediate and final answers to the nearest whole dollar amount.)

Analysis Component:
If the fair value adjustment is not recorded by Safety Development Corporation, what is the impact on the financial statements?

Answer 1

Part 1

	Cash Interest Received	Period Interest Income	Discount Amort.	Unamortized Discount	Carrying Value
Apr. 1/20				$1,242	$88,758
June 30/20	$1,530	$1,598	$68	1,174	88,826
Sept. 30/20	1,530	1,599	69	1,105	88,895
Dec. 31/20	1,530	1,600	70	1,035	88,965

Part 2

2020
Feb.	7	Investment – Royal Bank Shares..................................	58,300
		Transaction Fees Expense............................................	500
		Cash.....................................................................		58,800
		To record purchase of investment; 2,200 × 26.50 = 58,300 + 500 = 58,800.
19	Investment – Imperial Oil Shares..................................	62,100
	Transaction Fees Expense............................................	250
	Cash.....................................................................		62,350
	To record purchase of investment; 1,200 × 51.75 = 62,100 + 250 = 62,350.
Apr. 1	Investment – Minco Bond..............................................	88,758
	Cash.....................................................................		88,758
	Purchased a 4-year, 6.8%, $90,000 bond with objective to hold for its contract life, 88,258 + 500= 88,758

May 26	Investment – BCE Shares...............................................	26,760
	Transaction Fees Expense..............................................	200
	Cash.......................................................................		26,960
	To record purchase of equity investment; 2,000 × 13.38 = 26,760 + 200 = 26,960
June 1	Cash.................................................................................	550
	Dividend Income....................................................		550
	To record collection of dividend income; 2,200 × 0.25 = 550.
17	Cash.................................................................................	32,400
	Investment Income (Loss)...............................................		600
	Investment – Royal BankShares.....................................		31,800
	To record sale of investment; 58,300/2,200 = 26.50 × 1,200 = 31,800; 1,200 × 27 = 32,400.
30	Cash.................................................................................	1,530
	Investment – Minco Bond................................................	68
	Interest Income......................................................		1,598
	Collected interest onbond.
Aug. 5	Cash.................................................................................	600
	Dividend Income....................................................		600
	To record collection of dividend income; 1,200 × 0.50 = 600.
Sept. 1	Cash.................................................................................	275
	Dividend Income....................................................		275
	To record collection of dividend income; 1,000 × 0.275 = 275.
30	Cash.................................................................................	1,530
	Investment – Minco Bond................................................	69
	Interest Income......................................................		1,599
	Collected interest on bond.
Dec. 31	Cash.................................................................................	1,530
	Investment – Minco Bond................................................	70
	Interest Income......................................................		1,600
	Collected interest on bond.

Dec. 31	Investment – Royal Bank Shares..................................	1,000
	Investment – BCE Shares.............................................	240
	Investment Loss.............................................................	704
	Investment - Imperial Oil Shares...................................		1,944
	To record year end fair valueadjustment.

		Cost	Fair Value	Difference
Royal Bank (1,000 × 27.50 = 27,500) .............	$ 26,500	$ 27,500	$ 1,000
Imperial Oil (1,200 × 50.13 = 60,156)...............	62,100	60,156	(1,944)
BCE (2,000 × 13.50 = 27,000)..........................	26,760	27,000	240
Total..................................................................	$115,360	$114,656	$ (704)

Part 3

SafetyDevelopment Corporation

Partial Balance Sheet

December 31, 2020

Assets

Current assets:

Investments, at fair value...................................................................................... $ 114,656

Non-current assets:

Investments, at amortized cost.................................................................................. 88,965

Analysis component:

If the fair valueadjustment is not recorded by SafetyDevelopment Corporation, profit, current assets, and equity will each be overstated by a net amount of $704.