Question

The following information relates to the debt securities investments of Sarasota Company.

1. On February 1, the company purchased 12% bonds of Gibbons Co. having a par value of $330,000 at 100 plus accrued interest. Interest is payable April 1 and October 1.

2. On April 1, semiannual interest is received.

3. On July 1, 10% bonds of Sampson, Inc. were purchased. These bonds with a par value of $181,200 were purchased at 100 plus accrued interest. Interest dates are June 1 and December 1.

4. On September 1, bonds with a par value of $57,600, purchased on February 1, are sold at 99 plus accrued interest.

5. On October 1, semiannual interest is received.

6. On December 1, semiannual interest is received.

7. On December 31, the fair value of the bonds purchased February 1 and July 1 are 95 and 93, respectively.

(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are available-for-sale securities. (Note to instructor: Some students may debit Interest Receivable at date of purchase instead of Interest Revenue. This procedure is correct, assuming that when the cash is received for the interest, an appropriate credit to Interest Receivable is recorded.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Date	Account Titles and Explanation	Debit	Credit
(1)	Feb. 1
(2)
(3)	Jul. 1
(4)	Sep. 1
(5)
(6)
(7)
		(To record interest.)

Answer 1

No.	Date	Account Titles and Explanation	Debit	Credit
1	Feb 1	Debt Investment (available-for-sale securities)	$      330,000
		Interest Revenue (Accrued interest = Oct prior period to Jan = 4 Months) (330000*12%*4/12)	$         13,200
		Cash		$      343,200
		To record the purchased 12% bonds of Gibbons Co.
2	Apr 1	Cash (330000*12%*6/12)	$         19,800
		Interest Revenue		$        19,800
		To record the semiannual interest received.
3	July 1	Debt Investment (available-for-sale securities)	$      181,200
		Interest Revenue (Accrued interest = June = 1 Months) (181200*10%*1/12)	$           1,510
		Cash		$      182,710
		To record the purchased 10% bonds of Sampson, Inc.
4	Sep 1	Cash ((57600*99%)+2880)	$         59,904
		Loss on sale of debt investment (57600*1%)	$               576
		Debt Investment (available-for-sale securities)		$        57,600
		Interest Revenue (Apr to Aug = 5) (57600*12%*5/12)		$          2,880
		To record the sold 12% bonds of Gibbons Co.
5	Oct 1	Cash	$         16,344
		Interest Revenue (272400*12%*6/12)		$        16,344
		To record the semiannual interest received. (Remaining bonds of Gibbons = 330000-57600 = 272400
6	Dec 1	Cash	$           9,060
		Interest Revenue (181200*10%*6/12)		$          9,060
		To record the semiannual interest received.
7	Dec 31	Interest Receivable	$         12,406
		Interest Revenue (Notes 1)		$        12,406
		To record the accrue interest.
	Dec 31	Unrealized Holding loss - OCI	$         26,304
		Fair Value Adjustment		$        26,304
		To record fair value adjustment.

Interest accrued on Gibbond (Sep to Dec = 4 months) (272400*12%*4/12)	$        10,896
Interest accrued on Sampon (Dec = 1 month) (181200*10%*1/12)	$          1,510
Accrue interest	$        12,406

Available-for-Sale Portfolio
Security	Cost	Fair Value	Unrealized Gain (Loss)
Gibbons Co. (Fair value = 272400*95%)	$      272,400	$      258,780	$ (13,620)
Sampson, Inc. (Fair value = 181200*93%)	$      181,200	$      168,516	$ (12,684)
Total	$      453,600	$      427,296	$ (26,304)