Problem 2: Stewart Enterprises acquired $500,000 of 8% bonds on Jan. 1, 2016, as
ID: 2592731 • Letter: P
Question
Problem 2: Stewart Enterprises acquired $500,000 of 8% bonds on Jan. 1, 2016, as a long-term investment. Management has the positive intent and ability to hold the bonds until maturity. The bonds pay interest semiannually on June 30 and December 31, and mature on Jan. 1, 2021. The market interest rate (yield) was 6% for bonds of similar risk and maturity. The present value of $1, n=10, i=3% is $0.74409; The present value of $1 annuity, n=10, i-3% is $8.53020. (a) How much did Stewart pay for the investment? (b) Prepare the journal entries (b.1) to record Stewart's investment in the bonds on Jan. 1, 2016, (b.2) to record interest on June 30, 2016, at the effective (market) rate, and (b.3) to record interest on Dec. 31, 2016, at the effective rate. (c) How would the investment be presented on the Dec. 31, 2016 balance sheet? (d) Some unexpected event forced Stewart to sell the bonds on Jan. 1, 2017 for $540,000. Prepare the journal entry to record the sale. (e) Now suppose Stewart considers this investment as trading securities. How would this investment be presented on the Dec. 31, 2016 balance sheet? Prepare the adjusting entry if necessary. The market price of the investment on Dec. 31, 2016 is $510,000. (f) Now suppose Stewart considers this investment as available-for-sale securities. Prepare the adjusting entry on Dec. 31, 2016 if necessary. The market price of the investment on Dec. 31, 2016 is $510,000. What would be the balance of accumulated other comprehensive income (indicate whether it is a debit or credit balance) on the Dec. 31, 2016 balance sheet?Explanation / Answer
Solution - a:
Interest rate of bond = 8%
Market rate = 6%
Therefore present value of bond considering 6% yield = ($20000 * 8.53020) + (500000*0.74409) = $542,649
Therefore Stewart should pay $542,649 for the investment.
Solution - b:
Journal Entries:
At the time of investment – 01.01.2016:
Investment in Bonds A/c Dr $542,649
To Bank A/c Cr $542,649
Receipt of Interest – 30.06.2016:
Bank A/c Dr $20,000
To Interest A/c Cr $16,279
To Investment in Bond A/c Cr $3,721
Receipt of Interest – 31.12.2016:
Bank A/c Dr $20,000
To Interest A/c Cr $16,168
To Investment in Bond A/c Cr $3,832
Solution c:
Ending balance of investment on 31.12.2016 = $542649 - $3721 - $3832 = $ 535,096
Investment will be redeemed in next year as under:
30.06.2017 = $20,000 – ($535,096*3%) = $3,947
31.12.2017 = $20,000 – ($531,149*3%) = $4,066
Therefore in balance sheet on 31.12.2016, investment of $8,013 will be shown as current investment and Investment of remaining amount $527,083 will be shown as Non-current investment.
Solution d:
Journal Entry – Sale of investment – 01.01.2017
Bank A/c Dr $540,000
To Investment in Bond A/c Cr $535,096
To Profit on sale of Investment A/c Cr $4,904
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.