(1)
Bonds
Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.
Accrued interest
The amount of interest that has already due, but the payment is not made yet, is known as accrued interest.
Straight line amortization bond
To Prepare: The appropriate journal entries for these long – term bond investments.
(1)
Explanation of Solution
Prepare necessary journal entries for long-term bond investment as on 1st July 2018.
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2018 | Bonds Investment | 16,000,000 | ||
July | 1 | |||
Discount on Bonds Investment | 300,000 | |||
Cash | 15,700,000 | |||
(To record the purchase of B bonds) |
Table (1)
Working note:
Calculate discount on bonds investment.
Hence, discount on bonds investment amount is $300,000.
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2018 | Investment in Bonds | 30,000,000 | ||
October | 1 | |||
Premium on Bonds Investment | 1,160,000 | |||
Interest Receivable | 1,200,000 | |||
Cash | 32,360,000 | |||
(To record the purchase of F bonds) |
Table (2)
Working notes:
Calculate the amount of interest receivable for 4 months (from June 1 to October 1).
Hence, interest receivable amount is $1,200,000.
Calculate the amount of cash paid.
Hence, cash paid amount is $32,360,000.
Journal entry for interest received on F bonds as son 31st December 2018.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2018 | Cash | 1,800,000 | ||||
December | 1 | |||||
Premium on Bonds Investment | 20,000 | |||||
Interest Receivable | 1,200,000 | |||||
Interest Revenue | 580,000 | |||||
(To record interest received on F bonds) |
Table (3)
Working notes:
Calculate the amount of cash received.
Hence, cash received amount is $1,800,000.
Calculate premium on bonds investment.
Hence, premium on bonds investment amount for two months is $20,000.
Calculate the interest revenue on the bond investment.
Hence, Interest revenue amount is $580,000.
Journal entry for interest accrued for B bonds as on 31st December 2018.
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2018 | Interest Receivable | 800,000 | ||
December | 31 | |||
Discount on Bonds Investment | 7,500 | |||
Interest Revenue | 807,500 | |||
(To record the interest accrued for B bonds) |
Table (4)
Working notes:
Calculate the amount of interest receivable.
Hence, interest receivable amount is $800,000.
Calculate discount on bonds investment.
Hence, discount on bond investment amount is $7,500.
Calculate the amount of interest revenue.
Hence, interest revenue amount is $807,500.
Journal entry for interest accrued for F bonds as on 31st December 2018.
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2018 | Interest Receivable | 300,000 | ||
December | 31 | |||
Premium on Bonds Investment | 10,000 | |||
Interest Revenue | 290,000 | |||
(To record the interest accrued for F bonds) |
Table (5)
Working notes:
Calculate the amount of interest receivable.
Hence, interest receivable amount is $300,000.
Calculate the amount of interest revenue.
Hence, interest revenue amount is $290,000.
Journal entry for interest received on B bonds as on 1st January 2019.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2019 | Cash | 800,000 | ||||
January | 1 | |||||
Interest Receivable | 800,000 | |||||
(To record interest received on B bonds) |
Table (6)
Working note:
Calculate the amount of interest received (cash received).
Hence, cash received amount is $800,000.
Journal entry for interest received on F bonds as on 1st June 2019.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2019 | Cash | 1,800,000 | ||||
June | 1 | |||||
Premium on Bonds Investment | 50,000 | |||||
Interest Receivable | 3,000,000 | |||||
Interest Revenue | 1,450,000 | |||||
(To record interest received on F bonds) |
Table (7)
Working notes:
Calculate the amount of cash received.
Hence, cash received amount is $1,800,000.
Calculate premium on bonds investment.
Hence, premium on bonds investment amount is $50,000.
Calculate the interest revenue on the bond investment.
Hence, interest revenue amount is $1,450,000.
Journal entry for interest received on B bonds as on 1st July 2019.
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2019 | Cash | 800,000 | ||
July | 1 | |||
Discount on Bonds Investment | 7,500 | |||
Interest Revenue | 807,500 | |||
(To record the interest accrued for B bonds) |
Table (8)
Journal entry for interest accrued for F bonds as on 1st September 2019.
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2019 | Interest Receivable | 450,000 | ||
September | 1 | |||
Premium on Bonds Investment | 15,000 | |||
Interest Revenue | 435,000 | |||
(To record the interest accrued for F bonds) |
Table (9)
Working notes:
Calculate the amount of interest receivable.
Hence, interest receivable amount is $450,000.
Calculate premium on bonds investment.
Hence, premium on bonds investment amount is $15,000.
Calculate the amount of interest revenue.
Hence, interest revenue amount is $435,000.
Journal entry for sale of F bonds as on 1st September 2019.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2019 | Cash | 15,600,000 | ||||
September | 1 | |||||
Loss on Sale of Investment | 375,000 | |||||
Premium on Bonds Investment | 525,000 | |||||
Bond Investment | 15,000,000 | |||||
Interest Receivable | 450,000 | |||||
(To record sale of F bonds) |
Table (10)
Working notes:
Calculate the amount of cash received.
Hence, cash received amount is $15,600,000.
Calculate premium on bonds investment.
Hence, premium on bonds investment amount is $525,000.
Calculate loss on sale of investment.
Hence, loss on sale of investment amount is $375,000.
Journal entry for interest received on F bonds as on 1st December 2019.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2019 | Cash | 900,000 | ||||
December | 1 | |||||
Premium on Bonds Investment | 30,000 | |||||
Interest Revenue | 870,000 | |||||
(To record interest received on F bonds) |
Table (11)
Working notes:
Calculate the amount of cash received.
Hence, cash received amount is $900,000.
Calculate premium on bonds investment.
Hence, premium on bonds investment amount is $30,000.
Calculate the interest revenue on the bond investment.
Hence, interest revenue amount is $870,000.
Journal entry for interest accrued for B bonds as on 31st December 2019.
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2019 | Interest Receivable | 800,000 | ||
December | 31 | |||
Discount on Bonds Investment | 7,500 | |||
Interest Revenue | 807,500 | |||
(To record the interest accrued for B bonds) |
Table (12)
Working notes:
Calculate the amount of interest receivable.
Hence, interest receivable amount is $800,000.
Calculate discount on bonds investment.
Hence, discount on bonds investment amount is $7,500.
Calculate the amount of interest revenue.
Hence, interest revenue amount is $807,500.
Journal entry for interest accrued for F bonds as on 31st December 2019.
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2019 | Interest Receivable | 150,000 | ||
December | 31 | |||
Premium on Bonds Investment | 5,000 | |||
Interest Revenue | 145,000 | |||
(To record the interest accrued for F bonds) |
Table (13)
Working notes:
Calculate the amount of interest receivable.
Hence, interest receivable amount is $150,000.
Calculate premium on bonds investment.
Hence, premium on bonds investment amount is $5,000.
Calculate the amount of interest revenue.
Hence, interest revenue amount is $145,000.
Journal entry for interest received on B bonds as on 1st January 2020.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2020 | Cash | 800,000 | ||||
January | 1 | |||||
Interest Receivable | 800,000 | |||||
(To record interest received on B bonds) |
Table (14)
Working note:
Calculate the amount of interest received (cash received).
Hence, cash received amount is $800,000.
Journal entry for interest accrued for F bonds as on 28th February 2020.
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2020 | Interest Receivable | 300,000 | ||
February | 28 | |||
Premium on Bonds Investment | 10,000 | |||
Interest Revenue | 290,000 | |||
(To record the interest accrued for F bonds) |
Table (14)
Working notes:
Calculate the amount of interest receivable.
Hence, interest receivable amount is $300,000.
Calculate premium on bonds investment.
Hence, premium on bonds investment amount is $10,000.
Calculate the amount of interest revenue.
Hence, interest revenue amount is $290,000.
Journal entry for sale of F bonds as on 28th February 2020.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2020 | Cash | 15,750,000 | ||||
February | 28 | |||||
Loss on Sale of Investment | 195,000 | |||||
Premium on Bonds Investment | 495,000 | |||||
Bond Investment | 15,000,000 | |||||
Interest Receivable | 450,000 | |||||
(To record sale of F bonds) |
Table (15)
Working notes:
Calculate the amount of cash received.
Hence, cash received amount is $15,750,000.
Calculate premium on bonds investment.
Hence, premium on bonds investment amount is $495,000.
Calculate loss on sale of investment.
Hence, loss on sale of investment amount is $195,000.
Journal entry for interest accrued for B bonds as on 31st December 2020.
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2020 | Interest Receivable | 800,000 | ||
December | 31 | |||
Discount on Bonds Investment | 7,500 | |||
Interest Revenue | 807,500 | |||
(To record the interest accrued for B bonds) |
Table (16)
Working notes:
Calculate the amount of interest receivable.
Hence, interest receivable amount is $800,000.
Calculate discount on bonds investment.
Hence, discount on bonds investment amount is $7,500.
Calculate the amount of interest revenue.
Hence, interest revenue amount is $807,500.
(2)
To Calculate: The earnings increase in each of the three years for L as a result of long-term bond investment.
(2)
Explanation of Solution
Calculate earnings in 2018.
Therefore, earnings amount as on 2018 is $1,677,500.
Calculate earnings in 2019.
Therefore, earnings amount as on 2019 is $4,140,000.
Calculate earnings in 2020.
Therefore, earnings amount as on 2020 is$902,500.
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Chapter 14 Solutions
SPICE ND LL INTERM ACCTG W/CONN+ AC
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