Cardinal Paz Corp.

carries an account in its general ledger called Investments, which contained

debits for investment purchases, and no credits, with the following descriptions.
Feb. 1, 2012

Sharapova Company common stock, $100 par, 200 shares $ 37,400

April 1

U.S. government bonds, 11%, due April 1, 2022, interest payable

April 1

and October 1, 110 bonds of $1,000 par each .110,000

July 1

McGrath Company 12% bonds, par $50,000, dated March 1, 2012,

purchased at 104 plus accrued interest, interest payable
annually on March 1, due March 1, 2032 .54,000

Instructions
(Round all computations to the nearest dollar.)
(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that all the
securities are classified as available-for-sale.
(b) Prepare the entry to record the accrued interest and the amortization of premium on December
31, 2012, using the straight-line method.
(c) The fair values of the investments on December 31, 2012, were:
Sharapova Company common stock $ 31,800
U.S. government bonds .124,700
McGrath Company bonds ...58,600
What entry or entries, if any, would you recommend be made?
(d) The U.S. government bonds were sold on July 1, 2013, for $119,200 plus accrued interest. Give
the proper entry.

SOLUTION

(a)

Debt Investments (Available-for-Sale) ...............................162,000*

Equity Investments (Available-for-Sale) ................................37,400
Interest Revenue ($50,000 X .12 X 4/12) ............................... 2,000
Investments ..............................................................................
*[$110,000 + ($50,000 X 1.04)]

201,400

(b)

December 31, 2012

Interest Receivable ....................................................................8,025
Debt Investments (Available-for-Sale) ....................................
Interest Revenue.......................................................................
[Accrued interest
[ $50,000 X .12 X 10/12 =
$5,000
[Premium amortization
[ 6/236 X $2,000 =
(51)
[Accrued interest
[ $110,000 X .11 X 3/12 =
3,025
$7,974]

(c)

51
7,974

December 31, 2012

Available-for-Sale Portfolio

Securities
Sharapova Company stock
U.S. government bonds
McGrath Company bonds
Total
Previous fair value adjustment balance

Cost
$ 37,400
110,000
51,949*
$199,349

Fair Value
$ 31,800
124,700
58,600
$215,100

Unrealized
Gain (Loss)
$ (5,600)
14,700
6,651
15,751
0
$15,751

Fair value adjustmentDr.

($50,000 X 1.04) $51
Fair Value Adjustment (Available-for-Sale) ............................15,751
Unrealized Holding Gain or Loss
Equity ............................................................................
(d)

15,751

July 1, 2013
Cash ($119,200 + $3,025)............................................ 122,225
Debt Investments (Available-for-Sale) ............................
Interest Revenue
($110,000 X .11 X 3/12) ...............................................
Gain on Sale of Investments ............................................

110,000
3,025
9,200