Question

On May 1, 2018, Delta Airlines buys 100 SkyFlight Food Service, Inc. bonds for $1,015 each. Delta classifies this investment as available for sale. This is the first available for sale investment Delta has recorded and the only itemthat affects comprehensive income during this time period. During 2018, SkyFlight pays all bondholders $42 interest per bond. At the end of 2018, the bonds of Skyflight are trading for $1,020 each. During 2019, Skyflight pays all bondholders interest of $75 per bond. At the end of 2019, the bonds of Skyflight are trading for $1,014 per bond. On May 1, 2020, Delta Airlines sells all of its Skyflight bonds for $1,010 per bond. No interest was paid by Skyflight in 2020. Net income before anything to do with Skyflight (even the interest is not included) for Delta was $20 million in 2018, $16 million in 2019 and $18 million in 2020 after taxes. The tax rate is 20% for all years.

Requirements:a.Show all the needed journal entries for the Skyflight stock from purchase to sale.

b.Show the statement of comprehensive income for 2018, 2019 and 2020.

c.If accumulated other comprehensive income is $500,000 at the beginning of 2018, what is the accumulated other comprehensive income at the end of 2018, 2019 and 2020.

Answer 1

a.

	Purchase of Securities
Date	Particulars	Debit	Credit
May 1 , 2018	Available-for-sale securities (100 bond x $1015)	1,01,500
	Cash		1,01,500
	Interest on Bond
Date	Particulars	Debit	Credit
2018	Cash	4200
	Interest on Bond (100 bond x $42)		4200
	Year end fair value of Securities
Date	Particulars	Debit	Credit
2018	Available-for-sale securities (1020-1015)*100	500
	Unrealized gain on available-for-sale securities (1020-1015)*100		500
	Interest on Bond
Date	Particulars	Debit	Credit
2019	Cash	7500
	Interest on Bond (100 bond x $75 )		7500
	Year end fair value of Securities
Date	Particulars	Debit	Credit
2019	Unrealized loss on available-for-sale securities	600
	Available-for-sale securities (1014-1020)*100		600
	Sale of Secutities transfer of unrealized gain / loss to realized
Date	Particulars	Debit	Credit
2020	Realized loss on available-for-sale securities	100
	Unrealized loss on available-for-sale securities		100
Date	Sale of Securities	Debit	Credit
2020	Cash	101000
	Realized loss on available-for-sale securities (1010-1014)*100	400
	Available-for-sale securities (1014*100 )		101400

b. Statement of comprehensive income

Investments (or Current Assets)*:
Available-for-sale securities	$102,000	$101,400	0
Stockholders’ equity:
Capital stock	$xxx,xxx	$xxx,xxx	$xxx,xxx
Additional paid-in capital	X,xxx	X,xxx	X,xxx
Total paid-in capital	$xxx,xxx	$xxx,xxx	$xxx,xxx
Other Comprehensive income	X,xxx	$500	$(100)
Less: Unrealized loss on available-for-sale securities		$600
Add : Unrealized gain on available-for-sale securities	$500		$100
Total Other Comprehensive income	$500	$(100)	$100
Retained earnings	Xx,xxx	Xx,xxx	Xx,xxx
Total stockholders’ equity	$xxx,xxx	$xxx,xxx	$xxx,xxx

c )

Total stockholders’ equity	$xxx,xxx	$xxx,xxx	$xxx,xxx
Partial Balance Sheet	2018	2019	2020
Investments (or Current Assets)*:
Available-for-sale securities	$102,000	$101,400	0
Stockholders’ equity:
Capital stock	$xxx,xxx	$xxx,xxx	$xxx,xxx
Additional paid-in capital	X,xxx	X,xxx	X,xxx
Total paid-in capital	$xxx,xxx	$xxx,xxx	$xxx,xxx
Other Comprehensive income	$500,000	$500,500	$499,900
Less: Unrealized loss on available-for-sale securities		$600
Add : Unrealized gain on available-for-sale securities	$500		$100
Total Other Comprehensive income	$500,500	$499,900	$500,000
Retained earnings	20,003,360	16,009,360	18,008,860
Total stockholders’ equity	$xxx,xxx	$xxx,xxx	$xxx,xxx