Question

Colah Company purchased $1 million of Jackson, Inc., 5% bonds at par on July 1, 2018, with interest paid semiannually.
Colah determined that it should account for the bonds as an available-for-sale investment. At December
31, 2018, the Jackson bonds had a fair value of $1.2 million. Colah sold the Jackson bonds on July 1, 2019 for
$900,000.

Required:
1. Prepare Colah’s journal entries to record:
a. The purchase of the Jackson bonds on July 1
b. Interest revenue for the last half of 2018
c. Any year-end 2018 adjusting entries
d. Interest revenue for the first half of 2019
e. Any entries necessary upon sale of the Jackson bonds on July 1, 2019, including updating the fair-value
adjustment, recording any reclassification adjustment, and recording the sale
2. Fill out the following table to show the effect of the Jackson bonds on Colah’s net income, other comprehensive
income, and comprehensive income for 2018, 2019, and cumulatively over 2018 and 2019.

2018 2019 Total
Net Income
OCI
Comprehensive Income

Answer 1

Solution:

a.July 1, 2018: Purchase of the Jackson bonds

AFS investment ...............................................................1,000,000

Cash..............................................................................1,000,000

b.December 31, 2018: Recognition of interest revenue

Cash ................................................................................25,000

Interest revenue ($1,000,000 × 5% × ½ year) ...................25,000

c.December 31, 2018: Year-end adjusting entries

Need to move from a fair-value adjustment of $0 to $200,000

d.June 30, 2019: Recognition of interest revenue

Cash ................................................................................25,000

Interest revenue ($1,000,000 × 5% × ½ year) ...................25,000

e.July 1, 2019: Any entries necessary upon sale of the Jackson bonds

1)Updating the fair-value adjustment:

2)Recording any reclassification adjustment:

Need to move from a fair-value adjustment of ($100,000) to $0

3)Recording the sale transaction:

Cash.............................................................................................900,000

Loss—NI (to balance)....................................................................100,000

AFS investment (amortized cost)....................................1,000,000