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    Financial Accounting: Debt and Stock Investment Transactions

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    P13-1A Journalize debt investment transactions and show financial statement presentation.

    Davison Carecenters Inc. provides financing and capital to the health-care industry, with a particular focus on nursing homes for the elderly. The following selected transactions relate to bonds acquired as an investment by Davison, whose fiscal year ends on December 31.

    Jan. 1 Purchased at par $2,000,000 of Hannon Nursing Centers, Inc., 10-year, 8% bonds dated January 1, 2008, directly from Hannon.
    July 1 Received the semiannual interest on the Hannon bonds.
    Dec. 31 Accrual of interest at year-end on the Hannon bonds.

    (Assume that all intervening transactions and adjustments have been properly recorded and that the number of bonds owned has not changed from December 31, 2008, to December 31, 2010.)

    Jan. 1 Received the semiannual interest on the Hannon bonds.
    Jan. 1 Sold $1,000,000 Hannon bonds at 106. The broker deducted $6,000 for commissions and fees on the sale.
    July 1 Received the semiannual interest on the Hannon bonds.
    Dec. 31 Accrual of interest at year-end on the Hannon bonds.

    (a) Journalize the listed transactions for the years 2008 and 2011.
    (b) Assume that the fair value of the bonds at December 31, 2008, was $2,200,000. These bonds are classified as available- for-sale securities. Prepare the adjusting entry to record these bonds at fair value.
    (c) Based on your analysis in part (b), show the balance sheet presentation of the bonds and interest receivable at December 31, 2008. Assume the investments are considered long-term. Indicate where any unrealized gain or loss is reported in the financial statements.

    P13-2A Journalize investment transactions, prepare adjusting entry, and show statement presentation.

    In January 2008, the management of Noble Company concludes that it has sufficient cash to permit some short-term investments in debt and stock securities. During the year, the following transactions occurred.

    Feb. 1 Purchased 600 shares of Hiens common stock for $31,800, plus brokerage fees of $600.
    Mar. 1 Purchased 800 shares of Pryce common stock for $20,000, plus brokerage fees of $400.
    Apr. 1 Purchased 50 $1,000, 7% Roy bonds for $50,000, plus $1,000 brokerage fees. Interest is payable semiannual on April 1 and October 1.
    July 1 Received a cash dividend of $0.60 per share on the Hiens common stock.
    Aug. 1 Sold 200 shares of Hiens common stock at $58 per share less brokerage fees of $200.
    Sept. 1 Received a $1 per share cash dividend on the Pryce common stock.
    Oct. 1 Received the semiannual interest on the Roy bonds.
    Oct. 1 Sold the Roy bonds for $50,000 less $1,000 brokerage fees.

    At December 31, the fair value of the Hiens common stock was $55 per share. The fair value of the Pryce common stock was $24 per share.

    (a) Journalize the transactions and post to the accounts Debt Investments and Stock Investments. (Use the T-account form.)
    (b) Prepare the adjusting entry at December 31, 2008, to report the investment securities at fair value. All securities are considered to be trading securities.
    (c) Show the balance sheet presentation of investment securities at December 31, 2008.
    (d) Identify the income statement accounts and give the statement classification of each account.

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    Solution Preview

    The attached MS Excel documents show how to complete the two attached problems ...

    Solution Summary

    This solution is comprised of two financial accounting problems dealing with the following concepts:
    How to
    1)journalize debt investment and investment transactions
    2) record an adjusting entry to record the investment at fair value,
    3) show a partial balance sheet financial statement presentation,
    4) identify income statement accounts and classify the accounts.

    The problems shown here are taken from Financial Accounting, 6th ed., Wiley Publishing, however, the detail step-by-step explanation of these topics provides students with a clear understanding of the concepts.