Question

Homework problem- Investment

The information below relates to Wynn Corporation's investments classified as available-for-sale 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 Entries
Date	Particulars		Debit	Credit
01-01-2017	Barr Company bonds A/c	Dr	$ 1,00,000.00
	TO Discount On Bonds			$   3,000.00
	To Cash A/c			$    97,000.00
	( Being Bonds Purchased)
09-05-2017	Pine, Inc. common stock A/c	Dr	$ 80,000.00
	To Cash A/c			$ 80,000.00
	( Being Stock Purchased - 3200 shares @ 25$ each)
31-12-2017	Cash A/c	Dr	$   9,000.00
	To Interest Received			$   9,000.00
	( Being Interest Received from Barr Company)
31-12-2017	Discount On Bonds	Dr	$   1,000.00
	To Barr Company bonds A/c			$   1,000.00
	( Being Bond valued at market price Reduction in barr shares to $99 hence ($100-$99)*1000)
31-12-2017	Discount on Bonds		$      180.00
	To P&L A/c			$      180.00
	( Being Discount on Bonds are Amortized after Adjusting the Loss in market Value)
31-12-2017	Profit & Loss A/c	Dr	$   6,400.00
	To Pine, Inc. common stock A/c			$   6,400.00
	( Being Shares valued at market price Reduction in barr shares to $23 hence ($25-$23)*3200)

B)

IF Fair Value is been Reported Then on 31-12-2017
	Barr Company bonds		$ 99,000.00
	Pine, Inc. common stock		$ 73,600.00

C)

Under Fair value option the unrealized income & loss is reported on the basis of the market value

D)

If Baar Company Bonds are hold upto maturity then on 31st dec the balance will be $ 1,00,000/-