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Intermediate Accounting: Reporting...
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Intermediate Accounting: Reporting...
Purchase, Discount Amortization, and Sale of Bond Investment On November 1, 2018, Reid Corporation acquired bonds with a face value of $700,000 for $673,618.61. The bonds carry a stated rate of interest of 10%, were purchased to yield 11%, pay interest semiannually on April 30 and October 31, were purchased to be held to maturity, and are due October 31, 2022. On November 1, 2019, in contemplation of a major acquisition, the bonds were sold for $700,000, Reid is on a fiscal year accounting period ending October 31 and uses the effective interest method.
Required:
Prepare journal entries to record the purchase of the bonds, the interest receipts on April 30, 2019, and October 31, 2019, and the sale of the bonds.
Prepare the journal entries to record the purchase of bonds, the interest receipts on April 30, 2019 and October 31, 2019 and the sale of bonds.
Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Prepare the journal entry to record the purchase of bonds:
| Date | Account Title and Explanation | Debit ($) | Credit ($) |
| November 1, 2019 | Investment in Held-to-Maturity Debt Securities | 673,618.61 | Â |
| Â | Â Â Â Â Cash | Â | 673,618.61 |
| Â | (To record the purchase of held-to-maturity securities at discount)] | Â | Â |
Table (1)
- 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 $673,618.61.
- Cash is an asset account and it is decreased. Thus, credit cash with $673,618.61.
Prepare the journal entry to record the interest receipts as on April 30, 2019 and October 31, 2019:
| Date | Account Title and Explanation | Debit ($) | Credit ($) |
| April 30, 2019 | Cash | 35,000.00 | Â |
| Â | Investment in Held-to-Maturity Debt Securities | 2,049.02 | Â |
| Â | Â Â Â Â Interest income | Â | 37,049.02 |
| Â | (To record the interest and amortization) | Â | Â |
| Â | Â | Â | Â |
| October 31, 2019 | Cash | 35,000.00 | Â |
| Â | Investment in Held-to-Maturity Debt Securities | 2,161.72 | Â |
| Â | Â Â Â Â Interest income | Â | 37,161.72 |
| Â | (To record the interest and amortization) | Â | Â |
Table (2)
Working note:
Prepare the bond interest income and discount amortization schedule:
| Corporation R | ||||
| Bond investment interest income and Discount amortization Schedule (Partial) | ||||
| Effective interest rate method | ||||
| Date | Cash (Debit) (a) | Interest income (Credit) (b) | Investment in debt securities (Debit) (c) | Carrying value of debt securities (d) |
| 11/11/2018 | Â | Â | Â | 673,618.61 |
| 04/30/2019 | 35,000.00 | 37,049.02 | 2,049.02 | 675,667.63 |
| 10/31/2019 | 35,000.00 | 37,161.72 | 2,161.72 | 677,829... |
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