Question

1. Using the following information, prepare journal entries for the year 2018 and indicate how XYZ Corp. should report its investment in its year end financial statements:

• the investment is considered Held to maturity.
• On January 1, 2018, JKL issued $6,000,000 of 8% bonds, due on January 1, 2026.
• The bonds, which pay interest semiannually on January 1 and July 1, were purchased by XYZ Corp. for $5,349,725 to yield 10%.
• The fair value at December 31, 2018, is $5,340,000.

2. Using the information on problem 2, prepare journal entries for the year 2018 but assuming the investment is considered Trading securities. Also, indicate how XYZ should report its investment in its year end financial statements.

Answer 1

Journal Entries under XYZ Corp.:
Purchase Price =240000*10.8378 + 6000000*0.4581=5349725
Date	Acc/ Titles	Debit $	Credit $
1-Jan-18	Trading Securities - Bond Receivables	6000000
	Discount on Bond Receivables		650275
	Cash		5349725
	(Purchase of trading securities - Bonds at discount)
1-Jul-18	Cash	240000
	Discount on Bond Receivables	27486.25		(5349725*5%)-240000
	Interest revenue		267486.25
	(first interest on Bonds received)
31-Dec-18	Interest receivable	240000
	Discount on Bond Receivables	28860.56		(5349725+27486.25)*5% -240000
	Interest revenue		268860.56
	(second interest on Bonds received)
CARRYING VALUE OF BONDS AT 2018 END = $5406072
31-Dec-18	Unrealised Loss on Fair Value adjustment	66072		(CV 5406072- FV 5340000)
	Trading Securities - Bond Receivables		66072
	(unrealised loss recorded on Fair value adjustment)

Reporting of investments in Financial Statements at year 2018 end:
Balance Sheet abstract :	Amount $
Assets:
Investments:
Trading Securities:
Bonds Receivables	5340000
Other Expenses / Losses:
Unrealised Loss on Fair Value adjustment	66072