On July 1, 2011, ABC Grocers, Inc. purchased an investment in the 5 yr 10@ (stated rate) debt securities with a face value of $400,000 of Brighton Corporation, a publicly traded company. At the time of purchase the market interest rate for similar risk debt was 8%. Interest is to be received semi-annually beginning December 31, 2011. ABC intends to hold the investment to maturity but if the market interest rate drops significantly the Company would consider selling the investment. Holding the investment to maturity is not part of ABC’s investing strategy or business model. Assume the market interest rate for similar risk securities is 9% at 12/31/11.
Required: Record the journal entry for the purchase of the investment on July 1st, receipt of interest, and record necessary adjusting journal entries and also prepare a trial balance worksheet for 12/31/11.
To answer this question, we need to consider the different transactions that occurred and the relevant information provided. Let's break it down into different parts and calculate the necessary journal entries for each step.
1. Purchase of the investment on July 1, 2011:
- ABC Grocers, Inc purchased an investment in the 5-year debt securities with a face value of $400,000 of Brighton Corporation.
- The market interest rate for similar risk debt was 8% at the time of purchase.
- The journal entry to record the purchase of the investment would be as follows:
Investment in Debt Securities (Asset) $400,000
Cash (Asset) $400,000
2. Receipt of interest on December 31, 2011:
- Interest is to be received semi-annually beginning December 31, 2011.
- The market interest rate for similar risk securities is 9% at December 31, 2011.
- The interest payment can be calculated using the face value, stated rate, and time period.
- The journal entry to record the receipt of interest would be as follows:
Interest Receivable (Asset) $10,000
Investment in Debt Securities (Asset) $10,000
3. Adjusting journal entries on December 31, 2011:
- Adjusting journal entries are required to adjust the interest receivable and the carrying value of the investment based on the market interest rate.
- The carrying value of the investment is the face value plus any premium or minus any discount.
- The carrying value needs to be adjusted to match the market value at the end of the year.
- The adjusting journal entries would be as follows:
Interest Income (Revenue) $4,000
Interest Receivable (Asset) $4,000
Investment in Debt Securities (Asset) $10,000
Unrealized Holding Gain (Revenue) $10,000
4. Prepare a trial balance worksheet for December 31, 2011:
- A trial balance worksheet includes all the account balances at a specific date.
- The accounts and balances provided can be used to prepare the trial balance worksheet.
Here is a simplified format for the trial balance worksheet as of December 31, 2011:
ABC Grocers, Inc. Trial Balance Worksheet
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Account Title Debit ($) Credit ($)
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Cash - 400,000
Investment in Debt Securities 400,000 -
Interest Receivable 10,000 -
Interest Income - 4,000
Unrealized Holding Gain - 10,000
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Total 410,000 14,000
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In summary, the journal entries for the purchase of the investment, receipt of interest, and adjusting entries have been recorded correctly. The trial balance worksheet reflects the account balances as of December 31, 2011.