Question 1 - Sebastian Company purchased $10,000 of 12 percent, five-year bonds on January 1, 2015, for $10,800. The bonds were selling for $10,100 as of December 31, 2015 and had an amortized cost of $10,640 on that date. The bonds pay interest annually on December 31, and they mature on December 31, 2019.
Required:
1. Assume that Sebastian does not plan to sell these securities in the short-term, nor do they intend to hold the bonds until December 31, 2019. How would they classify these bonds? (Trading, Available-for-Sale, Held-to-Maturity).
2. Based on your answer to question 1, at what amount would the bonds be reported on the balance sheet at December 31, 2015?
3. Based on your answer to question 1, prepare the journal entry to adjust the security to market value on December 31, 2015, if applicable.
4. Ignoring your answers to questions 1 -3, assume, instead, that Sebastian DOES intend to hold the bonds until December 31, 2019. How would Sebastian classify the bonds? (Trading, Available-for-Sale, Held-to-Maturity).
5. Based on your answer to question 4, at what amount would the bonds be reported on the balance sheet at December 31, 2015?
6. Based on your answer to question 4, prepare the journal entry to adjust the security to market value on December 31, 2015, if applicable.
Question 2 - On January 1, 2015, Sanchez Company purchased 25,000 of the 100,000 outstanding common shares of Manitoba Company for $10 per share. During the year, Manitoba Company declared net income of $300,000 and paid $60,000 of dividends. On December 31, 2015, Manitoba Company's stock had a fair value of $12 per share.
Required:
a. Prepare all necessary entries, assuming that Sanchez Company is able to exert significant influence over Manitoba Company.
b. Prepare all necessary entries assuming that Sanchez Company is NOT able to exert significant influence over Manitoba Company.