Question

Debt Investment Transactions, Available-for-Sale Valuation

Rekya Mart Inc. is a general merchandise retail company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Rekya Mart Inc., which has a fiscal year ending on December 31:

Year 1
Apr. 1.	Purchased $60,000 of Smoke Bay 4%, 10-year bonds at their face amount plus accrued interest of $400. The bonds pay interest semiannually on February 1 and August 1.
May 16.	Purchased $124,000 of Geotherma Co. 6%, 12-year bonds at their face amount plus accrued interest of $310. The bonds pay interest semiannually on May 1 and November 1.
Aug. 1.	Received semiannual interest on the Smoke Bay bonds.
Sept. 1.	Sold $24,000 of Smoke Bay bonds at 103 plus accrued interest of $80.
Nov. 1.	Received semiannual interest on the Geotherma Co. bonds.
Dec. 31	Accrued $480 interest on Smoke Bay bonds.
Dec. 31	Accrued $620 interest on Geotherma Co. bonds.
Year 2
Feb. 1.	Received semiannual interest on the Smoke Bay bonds.
May 1.	Received semiannual interest on the Geotherma Co. bonds.

Required:

1. Journalize the entries to record these transactions. For a compound transaction, if an amount box does not require an entry, leave it blank.

Date	Description	Debit	Credit
Year 1
Apr. 1.
May 16.
Aug. 1.
Sept. 1.
Nov. 1.
Dec. 31 Smoke Bay
Dec. 31 Geotherma Co.
Year 2
Feb. 1.
May 1.

2. If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure?

If the bonds are classified as available-for-sale securities, then the portfolio of bonds would need to be adjusted to  . This would be accomplished by using a valuation allowance account and   account.

Answer 1

Date	Account Tittle	debit	credit
Year 1
Apr. 1	investments - Smoke Bay Bonds	$60,000.00
	Interest receivable	$400.00
	Cash		$60,400.00
May-16	investments - Geotherma Co. Bonds	$1,24,000.00
	Interest receivable	$310.00
	Cash		$1,24,310.00
Aug. 1	cash	$900.00
	Interest receivable		$400.00
	Interest revenue (60000*4%*4/12)		$800.00
Sep. 1	cash (24000*1.03)+80	$24,800.00
	Interest revenue		$80.00
	Gain on sale of investment		$720.00
	Investments - Smoke Bay Bonds		$24,000.00
Nov. 1	cash	$3,100.00
	Interest receivable		$310.00
	Interest revenue (124000*6%*4.5/12)		$2,790.00
Dec. 31	interest receivable	$480.00
	Interest revenue		$480.00
Dec. 31	interest receivable	$620.00
	Interest revenue		$620.00
Year 2
Feb. 1	cash	$600.00
	Interest receivable		$480.00
	Interest revenue (60000-24000)*4%*1/12		$120.00
May. 1	cash	$3,100.00
	Interest receivable		$620.00
	Interest revenue (124000*6%*4/12)		$2,480.00