Reference no: EM132613875
Question - Raul has authorized 150,000 common shares and 10,000 preferred shares. The preferred shares will be cumulative and pay $5 dividends. Raul wants to keep control of his business, so he will keep his 90,000 common shares and will sit on the board of directors.
Raul has located a few private investors that wish to purchase shares in the new corporation. Some want common shares, while other are interested in preferred shares. On January 1, 2020, Raul issues 20,000 common shares for $50,000 cash and issues 4,000 preferred shares for $16,000 cash.
On March 1, 2020, Holster Electric Inc. issued and sold $120,000, 6 year bonds with an interest rate of 7%. The market rate at the time of issue was 8%. Any premium or discount on the bond is amortized using the effective interest rate method. Interest will be paid annually on February 28. Use a 4 decimal factor for the bond calculation.
During 2020, the company has performed well, so the board of directors decided to pay dividends. On November 30, 2020, the company declared cash dividends of $60,000, which will be paid out on December 15, 2020. Use the cash dividends method and close cash dividends at the end of the year.
During the year, Holster Electric made the following investments:
a) On January 1, Holster purchased a strategic investment of 15,000 shares in Greg-or Inc. for $12 per share. This represents 40% of Greg-or Inc. common shares. On December 31, Greg-or Inc. declares and pays a $40,000 dividend and reports a net income of $300,000. Holster will use the equity method to record this investment.
b) On April 17, they purchased a $20,000, 90 day T-bill at 4% for $19,804. The T-bill matures on July 16.
c) On July 1, they purchased a $40,000, 5 year bond paying 6% when the market rate was 8%. Interest is paid every 6 months on December 31 and June 30. Holster paid $36,756 to purchase the bond and plans to hold onto the bond until it matures.
d) On November 23, the company purchased 3,000 shares of Darkener Inc. at $19 per share for the purpose of trading. The shares are less than 4% of the total shares of Darkener Inc. and are a non-strategic investment. By December 31, the price per share had gone up to $23 per share.
Required - Prepare the journal entries for the issue of shares, issue of the bonds and the dividends, plus all the investments made during the year. Also prepare adjustments at year end to accrue interest on the bond and to record change to any applicable investments.