Question

Starbucks is a global company that provides high-quality coffee products. Assume that as part of its expansion strategy, Starbucks plans to open numerous new stores in Mexico in three years. The company has $ 7 million to support the expansion and has decided to invest the funds in corporate bonds until the money is needed. Assume that Starbucks purchased bonds with $ 7 million face value at par for cash on July 1 of the current year. The bonds pay 7 percent interest the following June 30 and December 31 and mature in three years. Starbucks plans to hold the bonds until maturity.
Required:
(c) Should Starbucks prepare a journal entry if the fair value of the bonds decreased to $ 6,000,000 on December 31 of the current year? Explain.

Answer 1

No, there is not any requirement of recording when the fair value of bonds decreases to $6000000 on December 31 of the current year.

Given that Starbucks purchased bonds with $ 7 million face value at par for cash on July 1 of the current year and the bonds pay 7 percent interest the following June 30 and December 31 and mature in three years.

We are required to tell whether there is requirement of any recording when the fair value of bonds decreases to $6000000 on December 31 of the current year.

A bond is basically a debt security, similar to an IOU and borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When we buy a bond, we are lending to the issuer, which may be a government, municipality, or corporation.

There is not any requirement of any recording when the fair value decreases to $600000 because it is not affecting our books of accounts because in our books they are recorded at face values.

Hence there is not any requirement of recording when the fair value of bonds decreases to $6000000 on December 31 of the current year.

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