Question 1 - Carow Corporation purchased, as a held-to-maturity investment, $62,900 of the 9%, 6-year bonds of Harrison, Inc. for $68,983, which provides a 7% return. The bonds pay interest semiannually.
Prepare Carow's journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual interest and premium amortization. Assume effective-interest amortization is used.
Question 2 - Hendricks Corporation purchased trading investment bonds for $51,430 at par. At December 31, Hendricks received annual interest of $2,600, and the fair value of the bonds was $48,580.
Prepare Hendricks' journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment.
Question 3 - 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, $104 par, 208 shares $44,600
April 1 U.S. government bonds, 10%, due April 1, 2022, interest payable April 1 and October 1, 115 bonds of $1,000 par each 115,000
July 1 McGrath Company 12% bonds, par $51,200, dated March 1, 2012, purchased at 104 plus accrued interest, interest payable annually on March 1, due March 1, 2032 55,296
(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 $35,490
U.S. government bonds 146,820
McGrath Company bonds 66,010
What entry or entries, if any, would you recommend be made?
(d) The U.S. government bonds were sold on July 1, 2013, for $120,480 plus accrued interest. Give the proper entry.