Question

Soto Industries Inc. is an athletic footware company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Soto Industries Inc., which has a fiscal year ending on December 31:

Record these transactions on page 10

Year 1
Apr.	1.	Purchased $83,400 of Welch Co. 7%, 15-year bonds at their face amount plus accrued interest of $973. The bonds pay interest semiannually on March 1 and September 1.
June	1.	Purchased $62,400 of Bailey 6%, 10-year bonds at their face amount plus accrued interest of $156. The bonds pay interest semiannually on May 1 and November 1.
Sept.	1	Received semiannual interest on the Welch Co. bonds.
	30	Sold $34,800 of Welch Co. bonds at 99 plus accrued interest of $203.
Nov.	1	Received semiannual interest on the Bailey bonds.
Dec.	31	Accrued $1,134 interest on the Welch Co. bonds.
	31	Accrued $624 interest on the Bailey bonds.

Record these transactions on page 11

Year 2
Mar.	1	Received semiannual interest on the Welch Co. bonds.
May	1	Received semiannual interest on the Bailey bonds.

Required:

1.	Journalize the entries to record these transactions. Refer to the information given and the Chart of Accounts provided for the exact wording of the answer choices for text entries.
2.	If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure?

CHART OF ACCOUNTS
Soto Industries Inc.
General Ledger
ASSETS 110 Cash 111 Petty Cash 120 Accounts Receivable 121 Allowance for Doubtful Accounts 131 Notes Receivable 132 Interest Receivable 141 Merchandise Inventory 145 Office Supplies 146 Store Supplies 151 Prepaid Insurance 161 Investments-Welch Co. Bonds 162 Investments-Bailey Bonds 165 Valuation Allowance for Trading Investments 166 Valuation Allowance for Available-for-Sale Investments 181 Land 191 Store Equipment 192 Accumulated Depreciation-Store Equipment 193 Office Equipment 194 Accumulated Depreciation-Office Equipment LIABILITIES 210 Accounts Payable 221 Notes Payable 231 Interest Payable 241 Salaries Payable 251 Sales Tax Payable EQUITY 311 Common Stock 312 Paid-In Capital in Excess of Par-Common Stock 321 Preferred Stock 322 Paid-In Capital in Excess of Par-Preferred Stock 331 Treasury Stock 332 Paid-In Capital from Sale of Treasury Stock 340 Retained Earnings 350 Unrealized Gain (Loss) on Available-for-Sale Investments 351 Cash Dividends 352 Stock Dividends 390 Income Summary	REVENUE 410 Sales 611 Interest Revenue 612 Dividend Revenue 631 Gain on Sale of Investments 641 Unrealized Gain on Trading Investments EXPENSES 511 Cost of Merchandise Sold 512 Bad Debt Expense 515 Credit Card Expense 516 Cash Short and Over 520 Salaries Expense 531 Advertising Expense 532 Delivery Expense 533 Repairs Expense 534 Selling Expenses 535 Rent Expense 536 Insurance Expense 537 Office Supplies Expense 538 Store Supplies Expense 561 Depreciation Expense-Store Equipment 562 Depreciation Expense-Office Equipment 590 Miscellaneous Expense 710 Interest Expense 731 Loss on Sale of Investments 741 Unrealized Loss on Trading Investments

1a. Journalize the entries to record Year 1 transactions. Refer to the information given and the Chart of Accounts provided for the exact wording of the answer choices for text entries.

PAGE 10

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION		DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17		Adjusting Entries
18
19
20
21

1b. Journalize the entries to record Year 2 transactions. Refer to the information given and the Chart of Accounts provided for the exact wording of the answer choices for text entries.

PAGE 11

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION		DEBIT	CREDIT
1
2
3
4
5
6

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 __________. This would be accomplished by using a valuation allowance account and an unrealized gain (loss) account as part of ________________ . If the fair value were ____________ than the cost of the bond portfolio, the two accounts would be positive and, thus, added to investments and stockholders’ equity, respectively. If the fair value were ________________ than the cost of the bond portfolio, the two accounts would be negative and, thus, subtracted from investments and stockholders’ equity, respectively.

Answer 1