Savers Mart Inc. is a general merchandise retail company that began operations on January 1, 2012. The following transactions relate to debt investments acquired by Savers Mart Inc., which has a fiscal year ending on December 31:
2012
May 1. Purchased $80,000 of Northridge City 4.5%, 10-year bonds at face value plus accrued interest of $600. The bonds pay interest semiannually on March 1 and September 1.
June 16. Purchased $38,000 of Hancock Co. 6%, 12-year bonds at face value plus accrued interest of $95. The bonds pay interest semiannually on June 1 and December 1.
Sept. 1 Received semiannual interest on the Northridge City bonds.
Oct. 1 Sold $24,000 of Northridge City bonds at 102 plus accrued interest of $90.
Dec. 1 Received semiannual interest on Hancock Co. bonds.
31. Accrued $840 interest on Northridge City bonds.
31. Accrued $190 interest on Hancock Co. bonds.
2013
Mar. 1 Received semiannual interest on the Northridge City bonds.
June. 1 Received semiannual interest on the Hancock Co. bonds
Instructions
1. Journalize the entries to record these transactions.
2. If the bond portfolio was classified as available-for-sale, what impact would this have on financial statement disclosure?

1.

 

 

 

2012

 

 

May 1 Investments-NorthridgeCity Bonds................. 80,000

 

 

Interest Receivable.................................................... 600

 

 

Cash........................................................................... 80,600

 

 

 

June 16 Investments-Hancock Co. Bonds...................... 38,000

 

 

Interest Receivable...................................................... 95

 

 

Cash........................................................................... 38,095

 

 

 

Sept. 1 Cash...................................................................... 1,800*

 

 

Interest Receivable.................................................... 600

 

 

Interest Revenue........................................................ 1,200

 

 

 

 

 

*$80,000 × 4.5% × Â½

 

 

 

Oct. 1 Cash.................................................................... 24,570*

 

 

Interest Revenue........................................................ 90

 

 

Gain on Sale of Investment....................................... 480

 

 

Investments-NorthridgeCity Bonds...................... 24,000

 

 

 

................................................. *($24,000 × 1.02) + $90

 

 

 

Dec. 1 Cash...................................................................... 1,140*

 

 

Interest Receivable.................................................... 95

 

 

Interest Revenue........................................................ 1,045

 

 

 

*$38,000 × 6% × Â½

 

 

 

31 Interest Receivable.................................................... 840

 

 

Interest Revenue........................................................ 840

 

 

Accrued interest.

 

 

 

31 Interest Receivable.................................................... 190

 

 

Interest Revenue........................................................ 190

 

 

Accrued interest.

 

 

 

2013

 

 

Mar. 1 Cash...................................................................... 1,260*

 

 

Interest Receivable.................................................... 840

 

 

Interest Revenue........................................................ 420

 

 

 

 

 

*$56,000 × 4.5% × Â½

 

 

 

June 1 Cash...................................................................... 1,140*

 

 

Interest Receivable.................................................... 190

 

 

Interest Revenue........................................................ 950

 

 

 

 

 

*$38,000 × 6% × Â½

 

 

 

 

2. If the bonds were classified as available-for-sale securities, then the portfolio of bonds would need to be adjusted to fair value. This would be accomplished by using a valuation allowance account to investments and unrealized gain (loss) account as part of stockholders' equity. If the fair value were greater than the cost of the bond portfolio, the two accounts would be positive, and thus added to investments and within stockholders' equity, respectively. If the fair value was less than the cost of bond portfolio, the two accounts would be negative, and thus subtracted from investments and within stockholders' equity, respectively.