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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, Premium Amortization, and Sale of Bond Investment Glover Corporation purchased bonds with a face value of $300,000 for $307,493.34 on January 1, 2019. The bonds carry a face rate of interest of 12%, pay interest semiannually on June 30 and December 31, were purchased to be held to maturity, are due December 31, 2021, and were purchased to yield 11%. On January 1, 2020, in contemplation of a major acquisition, the bonds were sold for $300.000. Glover uses the effective interest method.

Required:

  1. 1. Prepare journal entries to record the purchase of the bonds, the first two interest receipts, and the sale of the bonds.
  2. 2. Next Level Discuss the considerations involved when held-to-maturity debt securities are sold prior to their maturity date.

1.

To determine

Record the journal entries for the purchase of bonds, interest receipts and the sale of the bonds.

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.

Record the journal entries for the purchase of bonds:

DateAccount Title and ExplanationDebitCredit
January 1, 2019Investment in Held-to-Maturity Debt Securities$307,493.34 
     Cash $307,493.34
 (To record the purchase of held-to-maturity securities at discount)  

Table (1)

  • Investment in held-to maturity debt securities is an asset. It is increased. Therefore, debit the investment in held-to-maturity debt securities account with $307,493.34.
  • Cash is an asset and decreased. Therefore, credit the cash account with $307,493.34

Record the interest income earned on June 30.

DateAccount Title and ExplanationDebitCredit
June 30, 2019Cash$18,000.00 
     Investment in Held-to-Maturity Debt     Securities$1,087.87
     Interest income $16,912.13
 (To record the interest and amortization)  

Table (2)

  • Cash is an asset and increased. Therefore, debit the cash account with $18,000.
  • Investment in held-to-maturity debt securities is an asset. It is decreased here due to amortization of premium. Therefore, debit the investment in held-to-maturity debt securities account with $1,087.87.
  • Interest income is an income. It increases the equity. Therefore, it is credited with $16,912.13.

Record the interest income earned on December 31.

DateAccount Title and ExplanationDebitCredit
December 31, 2019Cash$18,000.00 
     Investment in Held-to-Maturity Debt     Securities$1,147.70
     Interest income $16,852.30
 (To record the interest and amortization)  

Table (3)

  • Cash is an asset and increased. Therefore, debit the cash account with $18,000.
  • Investment in held-to-maturity debt securities is an asset. It is decreased here due to amortization of premium. Therefore, debit the investment in held-to-maturity debt securities account with $1,147.70.
  • Interest income is an income. It increases the equity. Therefore, it is credited with $16,852.30.

Record the sale of bond on January 1, 2020.

DateAccount Title and ExplanationDebitCredit
January 1, 2020Cash$300,000.00 
 Loss on sale of debt securities (Balancing Figure)$5,257.77 
     Investment in Held-to-Maturity Debt     Securities (from schedule) $305,257...

2.

To determine

Explain the considerations involved when held-to-maturity debt securities are sold prior to their maturity date.

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