Ch 12 Investment Examples

Margot Company purchases $100,000 face amount, 6% semi-annual bonds for $110,000 when the market interest rate is 5%. Margot should recognize the following interest revenue for the first 6-month period:

110,000 * (6/12 * 5%) = 2,750

Otto Company purchases $200,000 face amount, 8% semi-annual bonds when the market rate is 7%. The rate used to determine interest revenue for the first 6 months on the investment is

3.5%

2. Record the sale transaction

Debit Cash Discount on bond investments Credit Investment in bonds FV adjustment

Unlike HTM securities, trading securities are carried at fair value and thus, an adjustment is required at the end of the accounting period. Masterwear bonds have a fair value of $714,943 as of December 31, 2024, the table shows the calculation of the balance in the fair value adjustment account that is required on that date.

Debit Fair Value adjustments 43,646 Credit Gain on investments - (unrealized, NI) 43,646

United sells the bond for $725,000 on January 1, 2025. 1. Adjust trading securities to fair value (2025)

Fair value adjustment 10,057 Gain on investments - (unrealized, NI) 10,057

Let's assume the United bond investment is classified as AFS. As of December 31, 2024, Masterwear has recorded the purchase of the bonds on July 1, 2024, as well as receipt of the first semiannual interest payment, so the bonds have an amortized cost of $671,297. The fair value of the bonds on December 31, 2024, is $714,943.

Fair value adjustment 43,646 Credit Unrealized Gain on investments (OCI) 43,646

At the time of acquisition, debt investments are recorded at

cost

How do you find the interest received?

face amount * stated rate

Equity and debt securities are commonly referred to as ____ instrument

financial

How do you find the interest revenue?

outstanding balance * market rate

The price of a bond is equal to

present value of future interest payments plus present value of principal

Holding bonds during periods in which the fair value of the bonds changes results in

unrealized holding gains and losses

When the Investor Lacks Significant InfluenceLess than 20% of voting shares July 1 Purchase Arjent, Inc., common stock for $1,500,000

Debit Investment in equity securities 1,500,000 Creidt Cash 1,500,000

When the Investor Lacks Significant InfluenceLess than 20% of voting shares Dec= 31, 2024 $75,000 cash dividend received from Arjent

Debit cash 75,000 Credit dividend revenue 75,000