Question

The following information shows Carperk Company's individual investments in securities during its current year, along with the December 31 fair values. Investment in Brava Company bonds: $416,850 cost; $453,116 fair value. Carperk intends to hold these bonds until they mature in 5 years. Investment in Baybridge common stock: 29,500 shares; $331,396 cost; $360,227 fair value. Carperk owns 32% of Baybridge's voting stock and has a significant influence over Baybridge. Investment in Duffa bonds: $170,909 cost; $184,240 fair value. This investment is not readily marketable and is not classified as held-to-maturity or trading. Investment in Newton notes: $95,042 cost; $93,426 fair value. Newton notes are not readily marketable and are not classified as held-to-maturity or trading. Investment in Farmers common stock: 16,300 shares; $104,213 cost; $110,674 fair value. This stock is marketable, and Carperk intends to sell it within the year. This stock investment results in Carperk having an insignificant influence over Farmers. Required: 1. Identify whether each investment should be classified as a short-term or long-term investment. For each investment, indicate in which of the six investment classifications it should be placed. 2. Prepare a journal entry dated December 31 to record the fair value adjustment for the portfolio of available-for-sale debt securities. Carperk had no available-for-sale debt securities prior to this year.

Answer 1

a. See the table below.

b. Debit Fair value adjustment - Available-for-sale for $47,981; and Credi Unrealized gain - Debt for $47,981.

Step-by-step explanation:

1. Identify whether each investment should be classified as a short-term or long-term investment. For each investment, indicate in which of the six investment classifications it should be placed.

This can be done as follows:

No. Types of investment Classification of investment

a. Long-term investment Debt investment held to maturity

b. Long-term investment Equity method investments 20%-50%

c. Long-term investment Available for sale dbt securities

d, Long-term investment Available for sale dbt securities

e. Short-term investment Stock investment <20%

2. Prepare a journal entry dated December 31 to record the fair value adjustment for the portfolio of available-for-sale debt securities. Carperk had no available-for-sale debt securities prior to this year.

The journal entries will look as follows:

General Journal Debit ($) Credit ($)

Fair value adjustment - Available-for-sale 47,981

Unrealized gain - Debt (w.1) 47,981

(To record the fair value adjustment for the portfolio of available-for-sale debt securities).

Workings (w.1):

No Fair Value ($) Cost ($) Gain (loss) ($)

A B C = A - B

a. 453,116 416,850 36,266

c. 184,240 170,909 13,331

d. 93,426 95,042 (1,616)

Total 730,782 682,801 47,981