Question

Stewart Enterprises has the following investments, all purchased prior to 2021:

Stewart does not intend to sell any of these investments and does not believe it is more likely than not that it will have to sell any of the bond investments before fair value recovers.

Required:
For each investment, Prepare the appropriate adjusting journal entries to account for each investment for 2021 and 2022.

1. Bee Company 5% bonds, purchased at face value, with an amortized cost of $4,080,000, and classified as held to maturity. At December 31, 2021, the Bee investment had a fair value of $3,520,000, and Stewart calculated that $280,000 of the fair value decline is a credit loss and $280,000 is a noncredit loss. At December 31, 2022, the Bee investment had a fair value of $3,720,000, and Stewart calculated that $160,000 of the difference between fair value and amortized cost was a credit loss and $200,000 was a noncredit loss.

Record any necessary journal entry for the credit losses.

Record any necessary journal entry for recovery of credit loss in 2022.

2. Oliver Corporation 4% bonds, purchased at face value, with an amortized cost of $2,560,000, classified as a trading security. Because of unrealized losses prior to 2021, the Oliver bonds have a fair value adjustment account with a credit balance of $220,000, such that the carrying value of the Oliver investment is $2,340,000 prior to making any adjusting entries in 2021. At December 31, 2021, the Oliver investment had a fair value of $2,220,000, and Stewart calculated that $140,000 of the difference between amortized cost and fair value is a credit loss and $200,000 is a noncredit loss. At December 31, 2022, the Oliver investment had a fair value of $2,780,000.

Record the fair value adjustment.

Record the fair value adjustment.

3. Jones Inc. 6% bonds, purchased at face value, with an amortized cost of $3,560,000, and classified as an available-for-sale investment. Because of unrealized losses prior to 2021, the Jones bonds have a fair value adjustment account with a credit balance of $420,000, such that the carrying value of the Jones investment is $3,140,000 prior to making any adjusting entries in 2021. At December 31, 2021, the Jones investment had a fair value of $2,720,000, and Stewart calculated that $235,000 of the difference between amortized cost and fair value is a credit loss and $605,000 is a noncredit loss. At December 31, 2022, the Jones investment had a fair value of $2,915,000, and Stewart calculated that $135,000 of the difference between amortized cost and fair value is a credit loss and $510,000 is a noncredit loss.

Record any necessary journal entry for the credit losses.

Record the fair value adjustment.

Record any necessary journal entry for recovery of credit loss in 2022.

Record the fair value adjustment.

Answer 1

Journal in the Books of Bee Corporation

Date	Particulars	Dr	Cr
31st December'2021	Loss on Purchase of Bonds A/c Discount on investment of Bond A/c	280,000	280,000
31st December'2021	Loss on Purchase of Bonds A/c Fair Value Adjustment A/c	280,000	280,000
31st December'2022	No Entry
31st December'2022	No Entry

Journal in the Books of Oliver Corporation

Date	Particulars	Dr	Cr
31st December'2021	No Entry
31st December'2021	No Entry
31st December'2022	Unrealized Gain/Loss on purchase of Bonds Fair Value Adjustment A/c	120,000	120,000
31st December'2022	Fair Value Adjustment A/c Unrealized Gain/Loss on purchase of Bonds	560,000	560,000

Journal in the Books of Jones Inc.

Date	Particulars	Dr	Cr
31st December'2021	No Entry
31st December'2021	No Entry
31st December'2021	Unrealized Gain/Loss on purchase of Bonds Fair Value Adjustment A/c	420,000	420,000
31st December'2021	Fair Value Adjustment A/c Unrealized Gain/Loss on purchase of Bonds	195,000	195,000