Reference no: EM132558640

Question 1 - On January 1, 2020, Windsor Company purchased $490,000, 10% bonds of Aguirre Co. for $453,933. The bonds were purchased to yield 12% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2025. Windsor Company uses the effective-interest method to amortize discount or premium. On January 1, 2022, Windsor Company sold the bonds for $455,456 after receiving interest to meet its liquidity needs.

A. Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale.

B. Prepare the amortization schedule for the bonds.

C. Prepare the journal entries to record the semiannual interest on (1) July 1, 2020, and (2) December 31, 2020.

(d) If the fair value of Aguirre bonds is $457,456 on December 31, 2021, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on December 31, 2020, is a debit of $3,452.)

(e) Prepare the journal entry to record the sale of the bonds on January 1, 2022.

Question 2 - The following information relates to the debt securities investments of Vaughn Company.

1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of $313,200 at 100 plus accrued interest. Interest is payable April 1 and October 1.

2. On April 1, semiannual interest is received.

3. On July 1, 9% bonds of Sampson, Inc. were purchased. These bonds with a par value of $216,000 were purchased at 100 plus accrued interest. Interest dates are June 1 and December 1.

4. On September 1, bonds with a par value of $54,000, purchased on February 1, are sold at 98 plus accrued interest.

5. On October 1, semiannual interest is received.

6. On December 1, semiannual interest is received.

7. On December 31, the fair value of the bonds purchased February 1 and July 1 are 94 and 92, respectively.

Required -

A. Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are available-for-sale securities. (Note to instructor: Some students may debit Interest Receivable at date of purchase instead of Interest Revenue. This procedure is correct, assuming that when the cash is received for the interest, an appropriate credit to Interest Receivable is recorded.)

Question 3 - Indigo Corp. is a medium-sized corporation specializing in quarrying stone for building construction. The company has long dominated the market, at one time achieving a 70% market penetration. During prosperous years, the company's profits, coupled with a conservative dividend policy, resulted in funds available for outside investment. Over the years, Indigo has had a policy of investing idle cash in equity securities. In particular, Indigo has made periodic investments in the company's principal supplier, Norton Industries. Although the firm currently owns 12% of the outstanding common stock of Norton Industries, Indigo does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Indigo as assistant controller, and her first assignment is to prepare the 2020 year-end adjusting entries for the accounts that are valued by the "fair value" rule for financial reporting purposes. Thomas has gathered the following information about Indigo' pertinent accounts.

1. Indigo has equity securities related to Delaney Motors and Patrick Electric. During 2020, Indigo purchased 90,000 shares of Delaney Motors for $1,432,000; these shares currently have a fair value of $1,658,000. Indigo' investment in Patrick Electric has not been profitable; the company acquired 55,000 shares of Patrick in April 2020 at $20 per share, a purchase that currently has a value of $710,000.

2. Prior to 2020, Indigo invested $22,551,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,682,000 on December 31, 2019. Indigo' 12% ownership of Norton Industries has a current fair value of $22,444,000 on December 2020.

Prepare the appropriate adjusting entries for Indigo as of December 31, 2020, to reflect the application of the "fair value" rule for the securities described above.