(1)
Bond investment:
Bond investments are debt securities which pay fixed interest revenue to the investor.
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
To journalize: The bond investment transactions in the books of Company RM
(1)
Explanation of Solution
Prepare journal entry for purchase of $100,000 bonds of Company SB, at face amount with an accrued interest of $900.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
April | 1 | Investments–Company SB Bonds | 90,000 | ||
Interest Receivable | 900 | ||||
Cash | 90,900 | ||||
(To record purchase of Company SB bonds for cash) |
Table (1)
- Investments–Company SB Bonds is an asset account. Since bonds investments are purchased, asset value increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Prepare journal entry for purchase of $210,000 bonds of Company G, at face amount with an accrued interest of $700.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
May | 16 | Investments–Company G Bonds | 42,000 | ||
Interest Receivable | 70 | ||||
Cash | 42,070 | ||||
(To record purchase of Company G bonds for cash) |
Table (2)
- Investments–Company G Bonds is an asset account. Since bonds investments are purchased, asset value increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Prepare journal entry to record the interest revenue received from Company SB bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
August | 1 | Cash | 2,700 | ||
Interest Receivable | 900 | ||||
Interest Revenue | 1,800 | ||||
(To record receipt of interest revenue) |
Table (3)
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest received from Company SB.
Prepare journal entry for $12,000 bonds of Company SB sold at 101%, with an accrued interest of $60.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
September | 1 | Cash | 12,180 | ||
Interest Revenue | 60 | ||||
Gain on Sale of Investments | 120 | ||||
Investments–Company SB Bonds | 12,000 | ||||
(To record sale of Company SB bonds) |
Table (4)
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
- Gain on Sale of Investments is an income account. Since income increases equity, equity value is increased, and an increase in equity is credited.
- Investments–Company SB Bonds is an asset account. Since bond investments are sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Calculate the cash received from the sale of bonds.
Particulars | Amount ($) |
Cash proceeds from sale of $12,000 bonds
|
12,120 |
Add: Accrued interest revenue | 60 |
Cash received | $12,180 |
Table (5)
Calculate the realized gain (loss) on sale of $40,000 bonds.
Particulars | Amount ($) |
Cash proceeds from sale of $12,000 bonds
|
12,120 |
Cost of bonds sold | (12,000) |
Gain (loss) on sale of bonds | $120 |
Table (6)
Prepare journal entry to record the interest revenue received from Company G bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
November | 1 | Cash | 840 | ||
Interest Receivable | 70 | ||||
Interest Revenue | 770 | ||||
(To record receipt of interest revenue) |
Table (7)
Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest received from Company G.
Prepare journal entry for accrued interest on Company SB bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
December | 31 | Interest Receivable | 1,950 | ||
Interest Revenue | 1,950 | ||||
(To record interest accrued) |
Table (8)
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Prepare journal entry for accrued interest on Company G bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
December | 31 | Interest Receivable | 280 | ||
Interest Revenue | 280 | ||||
(To record interest accrued) |
Table (9)
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Prepare journal entry to record the interest revenue received from Company SB bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
February | 1 | Cash | 2,340 | ||
Interest Receivable | 1,950 | ||||
Interest Revenue | 390 | ||||
(To record receipt of interest revenue) |
Table (10)
Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest received from Company SB.
Prepare journal entry to record the interest revenue received from Company G bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
May | 1 | Cash | 840 | ||
Interest Receivable | 280 | ||||
Interest Revenue | 560 | ||||
(To record receipt of interest revenue) |
Table (11)
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest received from Company G.
(2)
To explain: The impact of bonds, if the portfolio is classified as available-for-sale investment
(2)
Explanation of Solution
Available-for-sale investments are reported at fair value. If the bond portfolio is classified as available-for-sale investment, the bond portfolio should be reported at fair value. The changes in the cost and fair value would be adjusted using the valuation account and unrealized gain (loss) account
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Chapter 13 Solutions
Financial & Managerial Accounting
- Saverin, Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin, Inc. issued 62,500,000 of 10-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of 66,747,178. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2016.arrow_forwardTransfer between Categories On December 31, 2018, Leslie Company held an investment in bonds of Kaufmann Company which it categorized as being held to maturity. At that time, the 8%, 100,000 face value bonds had a carrying value of 107,023.56 and were being amortized using the effective interest method based on a market rate of 7%. Interest on these bonds is paid annually each December 31. On December 31, 2019, after recording the interest earned, Leslie decided to reclassify the Kaufmann bonds to its available-for-sale category in anticipation of a major restructuring. At that time, the ending quoted market price for the bonds was 105,000. Required: Prepare the journal entries on December 31, 2019, to record the interest earned and the reclassification.arrow_forwardParilo Company acquired 170,000 of Makofske Co., 5% bonds on May 1, 2016, at their face amount. Interest is paid semiannually on May 1 and November 1. On November 1, 2016, Parilo Company sold 50,000 of the bonds for 96. Journalize entries to record the following: a. The initial acquisition of the bonds on May 1. b. The semiannual interest received on November 1. c. The sale of the bonds on November 1. d. The accrual of 1,000 interest on December 31, 2016.arrow_forward
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