Reference no: EM132737402
Nguyen Enterprises, Inc. invests its excess cash in various investment products to earn additional returns. During 2021, Nguyen acquired two investment securities on January 1, 2021 as follows:
(1) $200,000 principal amount of bonds issued by Lee Corporation. The bonds pay interest semiannually at a rate of 5% and have a maturity date of December 31, 2025. Investors priced these bonds based on a rate of 4%, and so the price Nguyen paid on January 1 was $208,982.59.
(2) 1,000 shares of the common stock of Chen Software, Inc. at $150 per share. Nguyen's share of ownership of Chen is less than 1%.
Nguyen intends to hold the Lee Corporation bonds for sale, but not as part of its trading portfolio.
Required:
Question 1. Show by doing the computations that the price of the Lee Corporation bonds is correct given the principal, interest payments, and the market rate of interest.
Question 2. Give the journal entries needed for the following events:
a. Purchase of the Lee Corporation bonds
b. Purchase of the Chen Software stock.
c. Receipt of interest payments and recognition of interest revenue on the Lee Corporation bonds on June 30 and December 31, 2021.
d. Any adjustments required at December 31, 2021 if the value of the Lee Corporation Bonds on that date is $210,000 and the value of the Chen Software stock is $155,000. Clearly indicate where any gains/losses will be reported in the financial statements.
e. Receipt of the principal of the Lee Corporation bonds on December 31, 2025.
Question 3. Briefly explain how the accounting for the Lee Corporation bonds (2a - 2e) would differ (if at all) if Nguyen indicated the intention to hold the securities until maturity rather than holding them for sale.
Question 4. List the disclosures that Nguyen would be required to include in its "notes to financial statements" related to these investments.
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