ACTG 351
Homework #3 (Investments) - Answers
1. Clear Monkey Technologies (CMT) purchased 10-year bonds issued from Banana Bandana’s
Inc with a face value of $2,000,000 and a stated rate of 8 percent on January 1, 2013.
Interest is payable semi-annually on December 31 and June 30. The market rate of interest for similar bonds is 10 percent. In addition, the market value of the bonds at June 30 and
December 31 were $2,037,000 and $1,977,000, respectively. Assume the company prepares financial reports semiannually at June 30 and December 31.
a) Assume CMT accounts for these bonds as (1) Held-to-Maturity Securities and (2)
Available-for-Sale Securities. Please record the initial purchase of the bonds and the first two interest payments on June 30 and December 31, as well as any adjusting entries on
June 30 and December 31 assuming these two classifications.
HTM and AFS (PV = 2,000,000*.37689 + 80,000*12.46221):
Jan 1
Investment in Bonds
2,000,000
Discount on Bonds
Cash
Jun 30
Cash
80,000
Discount on Bonds
7,538
Interest Revenue
Dec 31
Cash
80,000
Discount on Bonds
7,915
Interest Revenue

249,243
1,750,757

87,538

87,915

Adjusting Entries for AFS:
Adjustment = 2,037,000 – 1,758,295 = 278,705
Jun 30
Fair Value Adjustment
278,705
Net Unrealized Gains/Losses – OCI

278,705

Adjustment = (1,977,000 – 1,766,210) - 278,705 = -67,915
Dec 31
Net Unrealized Gains/Losses – OCI
67,915
Fair Value Adjustment

67,915

b) CMT sells the bonds on January 1, 2014 for $1,988,000. Please record the entry for the sale using the above two classifications.

1

Jan 1

Cash
Discount on Bonds
Investment in Bonds
Gain on Sale of Bonds

1,988,000
233,790
2,000,000
221,790

c) For the bonds classified at AFS, also make the fair value adjusting entry at the end of
June, 2014 assuming this was the only AFS investment.
Jun 30