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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 13, Problem 3E
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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Purchase of Bonds between Interest Dates On March 31, 2019, Brodie Corporation acquired bonds with a par value of $400,000 for $425,800. The bonds are due December 31, 2024, carry a 12% annual interest rate, pay interest on June 30 and December 31, and are being held to maturity. The accrued interest is included in the acquisition price of the bonds. Brodie uses straight line amortization.

Required:

  1. 1. Prepare journal entries for Brodie to record the purchase of the bonds and the first two interest receipts.
  2. 2. Next Level If Brodie failed to separately record the interest at acquisition, explain the errors that would occur in the Company’s financial statements (no calculations are required).

1.

To determine

Record the journal entries in the books of Corporation B.

Explanation

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Held to maturity securities:

These are the securities which are purchased with an intension to hold the securities till their maturity.

Prepare the journal entry to record the purchase of the bonds:

DateAccount Title and ExplanationDebit  ($)Credit ($)
March 31, 2019Investment in Held-to-Maturity Debt Securities (1)413,800  
 Interest income (2)12,000  
     Cash 425,800
 (To record the purchase of held-to-maturity securities)  

Table (1)

Working note (1):

Calculate the total amount of investment in held-to maturity debt securities made by Corporation B:

Investment in held-to-maturitydebt securities }=[Total amount of cash paid to purchase thebond−Amount of interest income paid]=$425,800−$12,000=$413,800

Working note (2):

Calculate the amount of interest income paid by corporation B:

Interest income = Face value of bond×Interest rate ×Number of months accrued12months=$400,000×12%×312=$12,000

  • Investment in held-to maturity debt securities is an asset account and it is increased. Thus, debit investment in held-to maturity debt securities with $413,800.
  • Interest income is revenue and it is decreased. Thus, debit interest income with $12,000.
  • Cash is an asset account and it is decreased. Thus, credit cash with $425,800.

Prepare the journal entry to record the interest receipt:

DateAccount Title and ExplanationDebit ($)Credit  ($)
June 30, 2019Cash (3)24,000 
 Investment in Held-to-Maturity Debt Securities (4)600
 Interest income (5) 23,400
 (To record the interest and amortization)  

Table (2)

Working note (3):

Calculate the amount of cash received as interest

2.

To determine

Explain the errors that would occur in the company’s financial statements if Corporation B has failed to record the interest at acquisition.

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