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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

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

To determine

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.

Explanation

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:

DateAccount Title and ExplanationDebit ($)Credit ($)
November 1, 2019Investment in Held-to-Maturity Debt Securities673,618.61 
     Cash 673,618.61
 (To record the purchase of held-to-maturity securities at discount)]  

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:

DateAccount Title and ExplanationDebit ($)Credit ($)
April 30, 2019Cash35,000.00 
 Investment in Held-to-Maturity Debt Securities2,049.02 
     Interest income 37,049.02
 (To record the interest and amortization)  
    
October 31, 2019Cash35,000.00 
 Investment in Held-to-Maturity Debt Securities2,161.72 
     Interest income 37,161.72
 (To record the interest and amortization)  

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
DateCash (Debit) (a)Interest income (Credit) (b)Investment in debt securities (Debit) (c)Carrying value of debt securities (d)
11/11/2018   673,618.61
04/30/201935,000.00 37,049.02 2,049.02 675,667.63
10/31/201935,000.00 37,161.72 2,161.72 677,829...

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