S10-6 Accounting for debt investments
Learning Objectives 3, 4
On June 1, 2018, Josh’s Restaurant decides to invest excess cash of $54,400 from the tourist season by
purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit’s bond had
a market value of $51,200. The investment is categorized as an available-for-sale debt investment and
will be held for the short-term.
Requirements
1. Journalize the transactions for Josh’s investment in Jackrabbit, Inc. for 2018.
2. In what category and at what value would Josh report the asset on the December 31, 2018, balance
sheet? In what account would the market price change in Jackrabbit’s stock be reported, if at all?
3. What was the net effect of the investment on Josh’s net income for the year ended December 31,
2018?
SOLUTION
Requirement 1
S10-6, cont.
Requirement 3
S10–7 Computing rate of return on total assets
Learning Objective 5
Barot’s 2018 financial statements reported the following items—with 2017 figures given for
comparison:
Net income for 2018 was $3,910, and interest expense was $240. Compute Barot’s rate of return on total
assets for 2018. (Round to the nearest percent.)
SOLUTION
Exercises
E10-8 Accounting for debt investments
Learning Objective 2
Griffin purchased a bond on January 1, 2018, for $140,000. The bond has a face value of
$140,000 and matures in 20 years. The bond pays interest on June 30 and December 31 at a 3%
annual rate. Griffin plans on holding the investment until maturity.
Requirements
1. Journalize the 2018 transactions related to Griffin’s bond investment. Explanations are not
required.
2. Journalize the transaction related to Griffin’s disposition of the bond at maturity on December
31, 2037. (Assume the last interest payment has already been recorded.) Explanations are not
required.
SOLUTION
Requirement 1
E10-9 Accounting for debt investments
Learning Objective 2
Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of
FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual
rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to
hold the investment until maturity.
Requirements
1. Journalize any required 2018 entries for the bond investment.
2. How much cash interest will Advance receive each year from FermaCo?
3. How much interest revenue will Advance report during 2018 on this bond investment?
SOLUTION
E10-10 Accounting for debt investments
Learning Objective 2
2a. Int. Rev. CR $36,000
League Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $900,000 of
CocoCorp bonds at face value on January 2, 2018. The CocoCorp bonds pay interest at the
annual rate of 8% on June 30 and December 31 and mature on December 31, 2022. League Up
intends to hold the investment until maturity.
Requirements
1. How would the bond investment be classified on League Up’s December 31, 2018, balance
sheet?
2. Journalize the following on League Up’s books:
a. Receipt of final interest payment on December 31, 2022.
b. Disposition of the investment at maturity on December 31, 2022.
SOLUTION
= $36,000
E10-11 Accounting for debt investments
Learning Objectives 2, 4
Peyton Investments completed the following investment transactions during 2018:
2018
Jan. 5 Purchased Vedder Company’s $400,000 bond at face value.
Peyton classified the investment as available-for-sale. The
Vedder bond pays interest at the annual rate of 4% on June 30
and December 31 and matures on December 31, 2021.
Management’s intent is to keep the bonds for several years.
Jun.
30
Received an interest payment from Vedder.
Dec.
31
Received an interest payment from Vedder.
31 Adjusted the investment to its current market value of $396,000.
Requirements
1. Journalize Peyton’s investment transactions. Explanations are not required.
2. Prepare a partial balance sheet for Peyton’s Vedder investment as of December 31, 2018.
3. Prepare a comprehensive income statement for Peyton Investments for year ended December
31, 2018. Assume net income was $200,000.
SOLUTION
E10-12 Accounting for equity investments
Learning Objectives 3, 4
Strategic Investments completed the following investment transactions during 2018:
Jan. 14 Purchased 800 shares of Phyflexon stock, paying $50 per share. The
investment represents 4% ownership in Phyflexon’s voting stock. Strategic
does not have significant influence over Phyflexon. Strategic intends to
hold the investment for the indefinite future.
Aug. 22 Received a cash dividend of $0.24 per share on the Phyflexon stock.
Dec. 31 Adjusted the investment to its current market value of $45 per share.
31 Phyflexon reported net income of $330,000 for the year ended 2018.
Requirements
1. Journalize Strategic’s investment transactions. Explanations are not required.
2. Classify and prepare a partial balance sheet for Strategic’s Phyflexon investment as of
December 31, 2018.
3. Prepare a partial income statement for Strategic Investments for year ended December 31,
2018.
SOLUTION
E10-12, cont.
Requirement 1, cont.
E10-12, cont.
Requirement 2