Fleet Inc. is an athletic footware company that began operations on January 1, 2012. The following transactions relate to debt investments acquired by Fleet Inc., which has a fiscal year ending on December 31:
2012
Mar. 1 Purchased $36,000 of Madison Co. 5%, 10-year bonds at face value plus accrued interest of $150. The bonds pay interest semiannually on February 1 and August 1.
Apr. 16 Purchased $45,000 of Westville 4%, 15-year bonds at face value plus accrued interest of $75. The bonds pay interest semiannually on April 1 and October 1.
Aug. 1 Received semiannual interest on the Madison Co. bonds.
Sept. 1 Sold $12,000 of Madison Co. bonds at 98 plus accrued interest of $50.
Oct. 1 Received semiannual interest on Westville bonds.
Dec. 31. Accrued $500 interest on Madison Co. bonds.
31. Accrued $450 interest on Westville bonds.
2013
Feb. 1 Received semiannual interest on the Madison Co. bonds.
Apr. 1 Received semiannual interest on the Westville 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

 

 

Mar. 1 Investments-Madison Co. Bonds...................... 36,000

 

 

Interest Receivable.................................................... 150

 

 

Cash........................................................................... 36,150

 

 

 

Apr. 16 Investments-Westville Bonds............................ 45,000

 

 

Interest Receivable...................................................... 75

 

 

Cash........................................................................... 45,075

 

 

 

Aug. 1 Cash......................................................................... 900*

 

 

Interest Receivable.................................................... 150

 

 

Interest Revenue........................................................ 750

 

 

 

*$36,000 × 5% × Â½

 

 

 

Sept. 1 Cash.................................................................... 11,810*

 

 

Loss on Sale of Investment....................................... 240

 

 

Interest Revenue........................................................ 50

 

 

Investments-Madison Co. Bonds........................... 12,000

 

 

 

*($12,000 × 0.98) + $50

 

 

 

Oct. 1 Cash......................................................................... 900*

 

 

Interest Receivable.................................................... 75

 

 

Interest Revenue........................................................ 825

 

 

 

*$45,000 × 4% × Â½

 

 

 

Dec. 31 Interest Receivable.................................................... 500

 

 

Interest Revenue........................................................ 500

 

 

Accrued interest.

 

 

 

31 Interest Receivable.................................................... 450

 

 

Interest Revenue........................................................ 450

 

 

Accrued interest.

 

 

 

2013

 

 

Feb. 1 Cash......................................................................... 600*

 

 

Interest Receivable.................................................... 500

 

 

Interest Revenue........................................................ 100

 

 

 

 

 

*$24,000 × 5% × Â½

 

 

 

Apr. 1 Cash......................................................................... 900*

 

 

Interest Receivable.................................................... 450

 

 

Interest Revenue........................................................ 450

 

 

 

 

 

*$45,000 × 4% × 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, thus subtracted from investments and within stockholders' equity, respectively.