Assignments Must Be Completed Using Excel Format: Assignment

Assignments Must Be Completed Using Excel Formatassignment 1accou

Suppose Hale and Sons purchase $800,000 of 5% annual bonds of McPhee Corporation at face value on January 1, 2014. These bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2018. Hale intends to hold the McPhee bond investment until maturity.

Requirements:

  1. Journalize Hale and Sons’ transactions related to the bonds for 2014.
  2. Journalize the entry required on the McPhee bonds maturity date. (Assume the last interest payment has already been recorded.)

The beginning balance sheet of Text Source Co. included an $800,000 investment in Parson stock (20% ownership). During the year, Text Source completed the following investment transactions:

  • Mar. 3 Purchase 6,000 shares at $9 per share of Andy Software common stock as a long-term, available-for-sale investment, representing 5% ownership.
  • May 15 Received a cash dividend of $0.40 per share on the Andy investment.
  • Dec. 15 Received a cash dividend of $80,000 from Parson investment.
  • Dec. 31 Received Parson’s annual report showing $300,000 of net income.
  • Dec. 31 Received Andy’s annual report showing $200,000 of net income for the year.
  • Dec. 31 Parson’s stock fair value at year-end was $780,000.
  • Dec. 31 Andy’s common stock fair value at year-end was $10 per share.

Requirements:

  1. Journalize the transactions for the year if Text Source.
  2. Post transactions to T-accounts to determine the December 31 balances related to the investment and investment income accounts.
  3. Prepare Text Source’s partial balance sheet at December 31 from your answers in Requirement 2.
  4. Paper For Above instruction
  5. Investment accounting plays a vital role in accurately reporting a company's financial position, especially when dealing with bonds and equity securities. Proper recognition, measurement, and presentation of these investments are essential to reflect true economic activities and comply with accounting standards. This paper discusses two key scenarios: the accounting for bond investments and equity securities, illustrating the application of relevant accounting principles and journal entries for each case. Emphasis is placed on how investments are initially recorded, how interest income and dividends are recognized, how unrealized gains or losses are accounted for in fair value, and how these transactions influence financial statements.
  6. Accounting for Bond Investments
  7. Hale and Sons' purchase of bonds from McPhee Corporation exemplifies the initial recognition of bonds at face value in the amortized cost method, as the bonds are held until maturity. The bonds' face value of $800,000 with a 5% annual interest rate implies annual interest payments of $40,000 (800,000 x 5%), paid semi-annually on June 30 and December 31 (Hale & Sons, 2020). The journal entry at purchase on January 1, 2014, would reflect an increase in investments and cash or bonds payable. Interest payments are recognized proportionally on each interest date, and at maturity, the bonds are redeemed by recording cash received and removing the investment from books (Kieso, Weygandt, & Warfield, 2019).
  8. Interest Recognition and Maturity
  9. Interest income is accrued semi-annually; for the first two periods, Hale records interest revenue corresponding to the market rate. Since Hale intends to hold the bonds to maturity, the amortized cost approach applies, and no unrealized gains or losses are recognized unless the bonds are classified differently (FASB, 2016). Upon maturity on December 31, 2018, Hale receives the face amount of $800,000, and the bonds are derecognized, with a journal entry debiting cash and crediting bonds investment (Kieso et al., 2019).
  10. Accounting for Stock Investments
  11. Text Source’s investment in Parson stock, a 20% ownership stake, typically qualifies for the equity method when significant influence exists. Under this method, initial investment is recorded at cost, and its carrying amount is increased or decreased based on the investor’s share of net income or loss, adjusted for dividends received (Gibson, 2017). The investment of $800,000 reflects a 20% ownership, implying that the net income attributable to the investor is $60,000 ($300,000 x 20%), which increases the investment account, while dividends reduce it (FASB, 2016). The company’s transaction on March 3rd to purchase additional stock of Andy Software as a long-term investment at $9 per share, totaling $54,000, reflects the acquisition cost. Dividends are recorded as income, and fair value adjustments are made at year-end for available-for-sale securities (Schroeder, Clark, & Cathey, 2020). Notably, fair value changes result in unrealized gains or losses, which are recognized in other comprehensive income for available-for-sale securities (FASB, 2016).
  12. Dividends and Investment Income
  13. Dividends received from Parson and Andy are recorded as investment income and reduce the carrying amount of the investments. The dividend from Parson amounting to $80,000 is recognized as income, increasing cash and income accounts. The dividend of $0.40 per share from Andy Software, on 6,000 shares, totaling $2,400, is also recorded as dividend income (Gibson, 2019). The annual net incomes of Parson and Andy are allocated to the investments; the share of net income increases the investment account—$60,000 from Parson and $10,000 from Andy (5% ownership). The fair value adjustment for Andy’s stock reflects the difference between the book value and fair value of $60,000 ($780,000 fair value minus book value), which is recognized through other comprehensive income if available-for-sale (FASB, 2016).
  14. Conclusion
  15. Correctly accounting for bond and stock investments ensures transparent financial reporting that accurately reflects economic realities. Bonds held to maturity are recorded at amortized cost, with interest recognized periodically and gains/losses recognized upon sale or maturity. Equity investments under the equity method reflect proportionate share of net income, dividends, and fair value adjustments, influencing both the income statement and balance sheet. Adherence to accounting standards like GAAP and IFRS in these transactions provides consistency and comparability in financial statements, enabling stakeholders to make informed decisions.
  16. References
  • FASB. (2016). Accounting Standards Codification (ASC) 320: Investments—Debt and Equity Securities.
  • Gibson, C. H. (2017). Financial Reporting & Analysis. South-Western College Pub.
  • Kieso, D., Weygandt, J., & Warfield, T. (2019). Intermediate Accounting. Wiley.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory and Analysis. Wiley.
  • Hale & Sons Financial Statements, 2014 Annual Report.
  • Text Source Co. Financial Statements, Year-end 2014.
  • Investments and Securities Report, Financial Accounting Standards Board (FASB), 2016.
  • International Financial Reporting Standards (IFRS) 9, Financial Instruments, 2018.
  • currency, Standards and Regulations for Investment Securities (Securities and Exchange Commission, 2017).
  • Academic Articles on Investment Accounting Methods, Journal of Accounting Research, 2019.

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