Knuth Farms is a grower of hybrid seed corn for DeKalb Genetics Corporation. It has had two exceptionally good years and has elected to invest its excess funds in bonds. The following selected transactions relate to bonds acquired as an investment by Knuth Farms, whose fiscal year ends on December 31.
2012
Jan. 1 Purchased at par $600,000 of Sullivan Corporation 10-year, 7% bonds dated January 1, 2012, directly from the issuing corporation.
July 1 Received the semiannual interest on the Sullivan bonds.
Dec. 31 Accrual of interest at year-end on the Sullivan bonds.
Assume that all intervening transactions and adjustments have been properly recorded and the number of bonds owned has not changed from December 31, 2012, to December 31, 2014.
2015
Jan. 1 Received the semiannual interest on the Sullivan bonds.
Jan. 1 Sold $300,000 of Sullivan bonds at 110. The broker deducted $7,000 for commissions and fees on the sale.
July 1 Received the semiannual interest on the Sullivan bonds.
Dec. 31 Accrual of interest at year-end on the Sullivan bonds.
Instructions
(a) Journalize the listed transactions for the years 2012 and 2015.
(b) Assume that the fair value of the bonds at December 31, 2012, was $586,000. These bonds are classified as available-for-sale securities. Prepare the adjusting entry to record these bonds at fair value.
(c) Show the balance sheet presentation of the bonds and interest receivable at December 31, 2012. Assume the investments are considered long-term. Indicate where any unrealized gain or loss is reported in the financial statements.