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 $85,800 of Welch Co. 10%, 15-year bonds at their face amount plus accrued interest of $1,430. The bonds pay interest semiannually on March 1 and September 1. June 1. Purchased $64,800 of Bailey 5%, 10-year bonds at their face amount plus accrued interest of $135. The bonds pay interest semiannually on May 1 and November 1. Sept. 1 Received semiannual interest on the Welch Co. bonds. 30 Sold $26,400 of Welch Co. bonds at 96 plus accrued interest of $220. Nov. 1 Received semiannual interest on the Bailey bonds. Dec. 31 Accrued $1,980 interest on the Welch Co. bonds. 31 Accrued $540 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

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.

Answer 1

1a)

Date	Account title	Debit	credit
1April	Investments - Welch Co. Bonds	85800
	Interest receivable	1430
	cash		87230
1June	Investments-Bailey Bonds	64800
	Interest receivable	135
	cash		64935
1Sep	Cash (85800*.10*6/12)	4290
	Interest receivable		1430
	Interest revenue		2860
Sep 30	Cash	25564
	Loss on sale of Investment	1056
	Investments - Welch Co. Bonds		26400
	Interest revenue		220
Nov 1	Cash (64800*.05*6/12)	1620
	Interest receivable		135
	Interest revenue		1485
Dec 31	Interest receivable [1980+540]	2520
	Interest revenue		2520
Year 2
Mar 1	Cash	2970
	Interest receivable		1980
	Interest revenue		990
May 1	Cash (64800*.05*6/12)	1620
	Interest receivable		540
	Interest revenue		1080

**Sep 30 :Cash received on sale of Bond = [26400*96/100] +220accrued interest

                          = 25344+220

                          = 25564

**Year 2

Interest received on Welch co .bonds =[85800-26400 sold]= 59400*10% *6/12= 2970

**There are 2 semiannual periods in a year comprising of 6 months each out of 12 months .