Class 21 Example questions and solutions
E16.9 At December 31, 2025, the available-for-sale debt portfolio for Steffi Graf, Inc. is as follows.
Unrealized
Security Cost Fair Value Gain (Loss)
A $17,500 $15,000 ($2,500)
B 12,500 14,000 1,500
C 23,000 25,500 2,500
Total $53,000 $54,500 1,500
• Previous fair value adjustment balance — Dr. 400
• On January 20, 2026, Steffi Graf, Inc. sold security A for $15,100. The sale proceeds are net of
brokerage fees.
Instructions (a and c only)
a. Prepare the adjusting entry at December 31, 2025, to report the portfolio at fair value.
b. Show the balance sheet presentation of the investment-related accounts at December 31, 2025
(Ignore notes presentation.)
c. Prepare the journal entry for the 2026 sale of security A.
Solution
(a) The portfolio should be reported at the fair value of $54,500. Since the cost of the portfolio is $53,000,
the unrealized holding gain is $1,500, of which $400 is already recognized. Therefore, the December
31, 2025 adjusting entry should be:
Fair Value Adjustment ................................................................................... 1,100
Unrealized Holding Gain or Loss—Equity ................................................... 1,100
(c) Computation of realized gain or loss on sale of debt security:
Net proceeds from sale of security A $15,100
Cost of security A (17,500)
Loss on sale of security A ($ 2,400)
January 20, 2026
Cash ................................................................................................... 15,100
Loss on Sale of Investments ................................................................ 2,400
Debt Investments.................................................................................. 17,500
E16.3 On January 1, 2025, Hi and Lois Company purchased 12% bonds having a maturity value of
$300,000 for $322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January
1, 2025, and mature January 1, 2030, with interest received on January 1 of each year. Hi and Lois
Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are
classified in the held-to-maturity category.
Instructions
a. Prepare the journal entry at the date of the bond purchase.
b. Prepare a bond amortization schedule.
c. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2025.
d. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2026.
Solution
(a) January 1, 2025
Debt Investments .............................................................. 322,744.44
Cash ......................................................................................... 322,744.44
(b) Schedule of Interest Revenue and Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%
Cash Interest Revenue Premium Amortized Carrying Amount of
Date Received Bonds
1/1/25 — — — $322,744.44
1/1/26 $36,000* $32,274.44** $3,725.56 319,018.88
1/1/27 36,000 31,901.89 4,098.11 314,920.77
1/1/28 36,000 31,492.08 4,507.92 310,412.85
1/1/29 36,000 31,041.29 4,958.71 305,454.14
1/1/30 36,000 30,545.86*** *5,454.14 300,000.00
*$300,000 × 0.12
**$322,744.44 × 0.10
***Rounded by 45¢.
(c) December 31, 2025
Interest Receivable ..................................................................... 36,000
Debt Investments .................................................................................... 3,725.56
Interest Revenue .......................................................................... 32,274.44
(d) December 31, 2026
Interest Receivable ..................................................................... 36,000
Debt Investments.......................................................................... 4,098.11
Interest Revenue .......................................................................... 31,901.89
