Q. 5SE_1 - Horngren'S Financial And Managerial Accounting

Question

Question: S10-5 Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of \(16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was \)19,600. The investment is categorized as a trading debt investment.

Requirements 

1. Journalize the transactions for Bell’s investment in Grant, Inc. for 2018. 

Step-by-Step Solution

Answer

Both sides of the journal totals $19,600.

Step 1: Definition of Unrealized Gains

The increase in the asset’s value that is still in possession of the business entity or individual is known as unrealized gain. It is reported as another comprehensive income.

Step 2: Journal Entries

Date	Accounts and Explanation	Debit $	Credit $
1 Feb 2018	Trading debt investment	$16,800
	Cash		$16,800
31 Dec 2018	Fair value adjustment – Trading debt	$2,800
	Unrealized holding gains		$2,800
		$19,600	$19,600