Question

1. Prepare Journal entries to record the following transactions involving short-term debt investments.
2. On May 15, paid $100 cash to purchase Muni’s 120 day short term debt securities ($100 stated value), that pay 6% interest. (categorized as held-to-maturity securities).
3. On September 13, received a check from Muni in payment of the principal and 120 days’ interest on the debt securities purchased in transaction above.

2. Gard Co. completes the following transactions to its short-term debt investments:

May 8: Purchased FedEx notes as short term investment in available for sale securities $12,975

Sep 2: Sold part of its investment in FedEx notes for $4,475 which had cost $4,325

Oct 2: Purchased Ajay bonds for $25,600 as a short term investment available for sale

Dec 31: Fair values of the debt securities available-for-sale by Gard are: $9,600 for FedEx and $22,000 for Ajay.

3. Prepare journal entries to record the following transactions for Garcia Company 2019:

Jan 1: Purchased 400 shares of Lopez Co common stock for $3,000 cash. Lopez has 1,000 shares of common stock outstanding.

Aug 1: Lopez declared and paid a cash dividend of $2 per share

Dec 31: Lopez reported net income for the year of $2,500

2020

Aug 1: Lopez declared and paid a cash dividend of $2,25 per share

Dec 31: Lopez reported net income for the year of $2,750

2021

Jan 1: Garcia sold all 100 shares of Lopez for $1,300 cash

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Answer 1

Short Term Debt Investment:

1. May 15 - Short Term Debt Securities (6% - Held to Maturity) A/c ...........Dr $100

To Cash/ Bank A/c................. $100

(Being Short term debt purchased and categorised as held to maturity)

2. Spet 13 - Bank A/c ..................Dr $102

Short Term Debt Securities (6% - Held to Maturity) A/c $ 100

To Interest (P/L) $ 2

(Being STD matured and principal received with interest @6% for 120 Days on $100)

3. Dec 31 Interest A/c............... Dr $2

to Profit & Loss A/c $2

(Being accounts transferred to P&L)

In the Books of Gard Co.

1. May 8 - Fedex Notes A/c .......................Dr $12,975

To Cash/ Bank A/c $12, 975

(Being FedEx notes purchased for investment)

2. Sept 2 Cash / Bank A/c ...........................Dr $4,475

To FedEx Notes A/c $ 4,325

To Profit & Loss A/c $ 150

(Being Part investment in FedEx notes sold for profit)

3. Oct 2 Ajay Bonds A/c ............................Dr $25,600

To Cash/ Bank A/c $ 25,600

(Being Short Investment in Ajay Bonds)

4. Dec 31 Fair Value Adjustment A/c (P&L) ..........Dr $3,600

To Ajay Bonds A/c $3,600

(Reduction in fair value of Ajay Bonds)

In the Books of Gracia Co.

1. Jan 1 Shares in Lopez Co A/c........................................Dr $3,000

To Cash/ Bank A/c $ 3,000

(Being 400 shares purchased of Lopez Co.)

2. Aug 1 Cash/ Bank A/c ............................Dr $800

To Dividend A/c $ 800

(Being Dividend received for Lopez Co @$2 / Share for 400 Shares)

3. Dec 31 Dividend A/c...........................Dr $800

To Profit & Loss A/c $800

(Being balances trf to P&L)

3. We do not pass a Journal entry for reporting of income in other companies.

4. Aug 1 2020 Cash/ Bank A/c ............................Dr $900

To Dividend A/c $ 900

(Being Dividend receieved from Lopez @$2,25/ Share for 400 Shares)

5. Dec 31 Cash A/c .........................Dr $ 1300

Profit & Loss A/c.............Dr $1700

To Shaers in Lopez Co A/c $1300

(Being loss booked on sales of shares)

6. Dec 31 Dividend A/c...........................Dr $900

To Profit & Loss A/c $900

(Being balances trf to P&L)