PROBLEM 1 XYZ Company acquired as a long term investment 44

PROBLEM

1

XYZ

Company

acquired as a long

-

term investment $440 million of 8% bonds,

on July 1,

2018

, and

management has the positive intent and

ability to hold the bonds until maturity

(three years, until

June 30

, 2021)

. The market interest rate

was 5% for bonds of similar risk and maturity.

XYZ

paid

$500 million for the bonds;

it

will receive interest semiannually on June 30 and December 31

.

a)

Prepare the journal entry to record

XYZ

’

s

investmen

t in the bonds on July 1, 2018

.

b)

Prepare the journal entries by

XYZ

to record interest on December 31,

2018.

c)

At what amount w

ill

XYZ

report its investment in the December 31,

2018

, balance sheet?

d)

Suppose KP’s bond rating agency upgraded the risk rating of the bonds, and

XYZ

Com

pany

decided to sell the investment

on January

1

, 2019

, for $520 million. Prepare the journal entry

to record the sale.

PROBLEM

2

ABC

Company buys and sells debt securities expecting to earn profits on short

-

term differences in

pri

ce. The company’s fiscal year ends on December 31. The following selected transactions relating

to

ABC

’

s

trading account

s

occurred during December

2017

and the first week of

2018.

2017

Dec.

12

Purchased 50 Simco bonds at par for $175,000

28

Received interest of $1,000 from the Simco bonds

31

Record

ed adjusting ent

ries relating to Simco bonds;

market price was $4,000 per bond

2018

Jan

.

02

Sold the

Simco bonds

for $197,500

a)

Prepare the appropriate journal entry for

each

transaction.

Solution

Problem 1 ($ in millions) Req 1 Account title and explanation Debit Credit Investment in bonds (face amount) $             440 Premium on bond investment (difference) $               60 Cash (price of bonds) $      500 Req 2 Cash (4% x $440 million) $          17.60 Premium on bond investment (difference) $     5.10 Interest revenue (2.5% x $500) $   12.50 Req 3 XYZ reports its investment in the December 31, 2011, balance sheet at its amortized cost – that is, its book value: Investment in bonds $             440 Add: Premium on bond investment ($60 – 5.10 million) 54.90 Amortized cost            494.90 Req 4 ($ in millions) Cash (proceeds from sale) $        520.00 Premium on bond investment (balance, determined above) $   54.90 Gain on sale of investments (to balance) $   25.10 Investment in bonds (face amount) $ 440.00 Note: I have tried my best for correct solution still you need any further help please ask in comment. Please post a separate question for problem 2 as it’s a different question, Thanks.