Soto Industries Inc. is an athletic footware company that began operations on Ja

Question

Soto Industries Inc. is an athletic footware company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Soto Industries Inc., which has a fiscal year ending on December 31:

Record these transactions on page 10

Record these transactions on page 11

Required:

X

Journal

Shaded cells have feedback.

CHART OF ACCOUNTSSoto Industries Inc.General Ledger

Year 1 Apr. 1. Purchased $100,000 of Welch Co. 6%, 15-year bonds at their face amount plus accrued interest of $500. The bonds pay interest semiannually on March 1 and September 1. June 1. Purchased $210,000 of Bailey 4%, 10-year bonds at their face amount plus accrued interest of $700. The bonds pay interest semiannually on May 1 and November 1. Sept. 1. Received semiannual interest on the Welch Co. bonds. 30. Sold $40,000 of Welch Co. bonds at 97 plus accrued interest of $200. Nov. 1. Received semiannual interest on the Bailey bonds. Dec. 31 Accrued $1,200 interest on the Welch Co. bonds. 31 Accrued $1,400 interest on the Bailey bonds.

Explanation / Answer

1) Journal Entries Date Account Titles and Explanation Debit Credit Apr.1 Investments --------Welch Co. Bonds $100,000 Interest Receivable $500                    Cash $100,500 Jun.1 Investments --------Bailey Co. Bonds $210,000 Interest Receivable $700                    Cash $210,700 Sept.1 Cash ($100,000 x 6%/2) $3,000            Interest Receivable $500            Interest Revenue $2,500 Sept.30 Cash ($40000 x .97)+200 $39,000 Loss on Sale of Investment $1,200                          Interest Revenue $200                          Investments --------Welch Co. Bonds $40,000 Nov.1 Cash ($210,000 x 4%/2) $4,200            Interest Receivable $700            Interest Revenue $3,500 Dec.31 Interest Receivables $1,200                  Interest Revenue $1,200 Dec.31 Interest Receivables $1,400                  Interest Revenue $1,400 Year 2 Mar.1 Cash ($100,000 x 6%/2) $3,000            Interest Receivable $1,200            Interest Revenue $1,800 May.1 Cash ($210,000 x 4%/2) $4,200            Interest Receivable $1,400            Interest Revenue $2,800 b) If the bonds are classified as available-for-sale securities, then the portfolio of bonds would be adjusted to fair value. The valuation allowance account and an unrealized gain (loss) account as part of stockholders’ equity will be impacted.If the fair value were greater than the cost of the bond portfolio valuation allowance account and an unrealized gain (loss) account would be positive then added to investments and stockholders’ equity respectively.If the fair value were lessor than the cost of the bond portfolio valuation allowance account and an unrealized gain (loss) account would be negative then subtracted from investments and stockholders’ equity respectively.

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