Q.11E_1 - Horngren'S Financial And Managerial Accounting

Question

Question: E10-11 Accounting for debt investments

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 

Journalize Peyton’s investment transactions. Explanations are not required.

Step-by-Step Solution

Answer

Answer

Both sides of the journal total $420,000.

Step 1: Definition of Market Value

The price at which the asset can be traded freely in the market without any force is known as market value. Such value is decided by the market factors such as demand, supply, and market conditions.

Step 2: Journal entries

Date	Accounts and Explanation	Debit $	Credit $
5 Jan 2018	Available for sale – Debt investment	$400,000
	Cash		$400,000
30 June 2018	Cash	$8,000
	Interest Revenue		$8,000
31 Dec 2018	Cash	$8,000
	Interest Revenue		$8,000
31 Dec 2018	Unrealized loss on available for sale securities	$4,000
	Fair value adjustment		$4,000
		$420,000	$420,000

calculation of interest revenue:

interest revenue: principal x interest rate x $\frac{6}{100}$

                            $$\begin{gathered} =\$400,000 \times 4\%\times \frac{6}{12} \\ =\$8000 \end{gathered}$$