Question

DEBT SECURITIES 2. Using the following information, prepare journal entries for the year 2015 and indicate how ABC should report its investment in its year end financial statements: • the investment is considered Held to maturity. • On July 1, 2015 ABC purchased $4,000,000 of XYZ’s 8% bonds, due on July 1, 2021. • The bonds, which pay interest semiannually on January 1 and July 1, were purchased for $3,645,470 to yield 10%. • The fair value at December 31, 2015 is $3,604,000.

3. Using information on problem 2, prepare journal entries for the year 2015 but assuming the investment is considered Trading securities. Also, indicate how ABC should report its investment in its year end financial statements.

Answer 1

2.

Date	General Journal	Debit	Credit
Jul. 1, 2015	Investment in debt securities	4000000
	Discount on bond investment		354530
	Cash		3645470
	(To record purchase of investment)
Dec. 31, 2015	Cash ($4000000 x 8% x 1/2)	160000
	Discount on bond investment	22274
	Interest revenue ($3645470 x 10% x 1/2)		182274
	(To record interest revenue and amortization of discount)

Amounts are rounded off to the nearest whole dollar.

Note: Held-to-maturity investments are reported at their amortized cost and not at the fair value.

3.

Date	General Journal	Debit	Credit
Jul. 1, 2015	Investment in trading securities	4000000
	Discount on bond investment		354530
	Cash		3645470
	(To record purchase of investment)
Dec. 31, 2015	Cash ($4000000 x 8% x 1/2)	160000
	Discount on bond investment	22274
	Interest revenue ($3645470 x 10% x 1/2)		182274
	(To record interest revenue and amortization of discount)
Dec. 31, 2015	Unrealized holding gain or loss-income	63744
	Fair value adjustment (trading)		63744
	(To record trading investments at fair value)

Working:

Amortized cost, Dec. 31, 2015	3667744
($3645470 + $22274)
Fair value, Dec. 31, 2015	3604000
Fair value adjustment	63744

Note: Trading investments are adjusted to their fair values.

ABC
Balance Sheet (Partial)
December 31, 2015
Current Assets:
Short-term investments	3604000

The trading securities will be shown on the balance sheet as short term investments at their fair value.