Question

Chapter HW on Investment in equity securities (Trading securities)

The information below relates to Wynn Corporation’s investments classified as trading securities in 2017 and:

1/1/17    Purchased $100,000 par value of Barr Company bonds at 97 with an annual yield of 10%. The bonds pay interest annually on 12/31. The annual interest rate is 9%.  

9/5/17     Purchased 3,200 shares of Pine, Inc. common stock for $25 per share.

12/31/17   Received $9,000 interest for investment in Barr Company bonds for 2017 (note: the discount should be amortized using the effective interest method when recording the receipt of the interest).

12/31/17   The market prices of the investments at 12/31/2017 were: Pine Inc. common stock $23 per share; and Barr company bonds, 99. Make the appropriate entries to apply the fair market valuation for these investments.

7/2/18       Wynn sold half of Pine, Inc. common stock for $36,160.

Required:

a. Prepare journal entries for the transactions occurred in 2017 (i.e., transactions on 1/1, 9/5 and 12/31), make the appropriate entries to apply the fair market valuation for these investments on 12/31/2017 and record the transaction of 7/2/2018.

b. If the management elected the fair value option for these investments, what would be the value of investments in Pine and Barr reported in 12/31/2017 balance sheet?

c. Under the fair value option, on what statement would the unrealized gain/loss be reported?   

d. If the management reported the investment in Barr as held-to-maturity securities without electing the fair value option, what would be the value of investment in Barr reported in 12/31/2017 balance sheet (i.e., the amortized cost of Barr on 12/31/2017)?

Answer 1

a. Journal Enteries

Date	Particulars	Debit	Credit
1/1/2017	Barr Company Bonds Account	$ 100,000.00
	Disount on Bonds Payable		$ 30,000.00
	Cash Account		$ 70,000.00
	(Being Purchase of Bonds at Discounted Value)
9/5/2017	Investment in Pine Inc. Commin Account	$    80,000.00
	Cash Account		$ 80,000.00
	Being Purchased 3,200 shares of Pine, Inc. common stock for $25 per share.
12/31/2017	Cash Account	$      9,000.00
	Disount on Bonds Payable	$      1,000.00
	Interest Income		$ 10,000.00
	Received $9,000 interest for investment in Barr Company bonds for 2017 Refer Note 1 for calucation of amortized disount using the effective interest method )
12/31/2017	Unreaalized Loss Account	$      7,400.00
	Barr Company Bonds Account		$    1,000.00
	Investment in Pine Inc. Commin Account		$    6,400.00
	Being Investment Value at Fair Market Value (Refer Note 2)
7/2/2018	Realised Loss Account	$      3,840.00
	Cash Account	$    36,160.00
	Unrealized Loss Account		$    3,200.00
	Investment in Pine Inc. Commin Account		$ 36,800.00
	Being Half of Common Stock for $ 36160 (Refer Note 3)

Notes :

		A	B	C=B-A
	Date	9% Interest	10% Interest
		Balance in Discount Account
Note :1		Debit Cash	Credit Interest Income	DebitDisc. On Bonds
	1/1/2017	9000	10,000	1,000
Note : 2	Pine Common Stock	Barr Company Bonds
Purchased Value	$                    80,000.00	$                                  100,000.00
Fair Market Value	$                    73,600.00	$                                    99,000.00
Loss	$                      6,400.00	$                                      1,000.00
Note : 3	Sold half (3200/2)	1600
Sales Prices	36160	i.e. Sold at 22.6 par Share
Cost Prices	40000	(1600*25)
Actual Loss	-3840
Out of this Loss we have already recorded loss of $   3200 for no of share 1600            (=6400/3200*1600)

b. If management selected Fair Value :

Value of Investment should have been :

	Pine Common Stock	Barr Company Bonds
Fair Value	$ 73,600.00	$                                  99000

c. Under fair Value Option Unrealised Gain or Losses must have been reported to Income & Statment Account

d. If management selected held to maturity Investment value is :

	Pine Common Stock	Barr Company Bonds
Fair Value	$                    80,000.00	$                                  100,000.00