Question

2. On January 2, 2019, X Co paid $99,000 for $100,000 of Debtor Co's 8% 10-year bonds. The bonds pay interest on 12/31 of each year. On December 31, 2019. Debtor Co paid the required interest payment. On that date, the Debtor bonds were trading at 97 INSTRUCTIONS; a. Prepare the journal entry that X Co. would make on 1/2/19 to record its acquisition of Debtor Co's bonds.. b. Assuming that X holds the bonds as available for sale securities, prepare the journal entries that X would record during 2019 to maintain its investment in the debt securities. c. Assuming INSTEAD that X holds the bonds as trading securities, prepare the X would record during 2019 to maintain its investment in the debt securities. Determine the total amount of revenue from the investment that X would show on its 2019 income statement assuming (that it holds the bonds as available for sale securities AND (i) that it holds the bonds as trading securities. d

Answer 1

Answer A
Date	Accounts title and explanations	Debit	Credit
Jan 2, 2019	Debt Investments	$        99,000
	Cash		$        99,000
	To record acquisition of debt investments.
Answer B (Available for sale securities = AFS)
Date	Accounts title and explanations	Debit	Credit
Dec 31, 2019	Cash (100000*8%)	$          8,000
	Interest Revenue		$          8,000
	To record interest received on debt investments.
Dec 31, 2019	Unrealized loss (Comprehensive income)	$          2,000
	Fair Value Adjustment - AFS		$          2,000
	To record the fair value adjustment. (Current Price = 100000*97% = 97000) (99000-97000). This is not part of the income statement but reported on the comprehensive income.
Answer C (Trading securities)
Date	Accounts title and explanations	Debit	Credit
Dec 31, 2019	Cash (100000*8%)	$          8,000
	Interest Revenue		$          8,000
	To record interest received on debt investments.
Dec 31, 2019	Unrealized loss (Net income)	$          2,000
	Fair Value Adjustment - Trading securities		$          2,000
	To record the fair value adjustment. (Current Price = 100000*97% = 97000) (99000-97000) This is part of the income statement and reported on the income statement.
Answer D
	Accounts title and explanations	Available for sale securities	Trading securities
	Interest Revenue	$          8,000	$          8,000
Less:	Unrealized loss (Net income)		$        (2,000)
	Total amount of revenue from debt investments	$          8,000	$          6,000