(1)
Bond investment: Bond investments are debt securities which pay a fixed interest revenue to the investor.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
To journalize: The bond investment transactions in the books of Company RM
(1)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Prepare journal entry for purchase of $100,000 bonds of Company SB, at face amount with an accrued interest of $900.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
Year 1 | |||||
April | 1 | Investments–Company SB Bonds | 90,000 | ||
Interest Receivable | 900 | ||||
Cash | 90,900 | ||||
(To record purchase of Company SB bonds for cash) |
Table (1)
Explanation:
- Investments–Company SB Bonds is an asset account. Since bonds investments are purchased, asset value increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Prepare journal entry for purchase of $210,000 bonds of Company B, at face amount with an accrued interest of $700.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
Year 1 | |||||
May | 16 | Investments–Company G Bonds | 42,000 | ||
Interest Receivable | 70 | ||||
Cash | 42,070 | ||||
(To record purchase of Company G bonds for cash) |
Table (2)
Explanation:
- Investments–Company G Bonds is an asset account. Since bonds investments are purchased, asset value increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Prepare journal entry to record the interest revenue received from Company SB bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
Year 1 | |||||
August | 1 | Cash | 2,700 | ||
Interest Receivable | 900 | ||||
Interest Revenue | 1,800 | ||||
(To record receipt of interest revenue) |
Table (3)
Explanation:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest received from Company SB.
Prepare journal entry for $12,000 bonds of Company SB sold at 101%, with an accrued interest of $60.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
Year 1 | |||||
September | 1 | Cash | 12,180 | ||
Interest Revenue | 60 | ||||
Gain on Sale of Investments | 120 | ||||
Investments–Company SB Bonds | 12,000 | ||||
(To record sale of Company SB bonds) |
Table (4)
Explanation:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
- Gain on Sale of Investments is an income account. Since income increases equity, equity value is increased, and an increase in equity is credited.
- Investments–Company SB Bonds is an asset account. Since bond investments are sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Calculate the cash received from the sale of bonds.
Particulars | Amount ($) |
Cash proceeds from sale of $12,000 bonds
| 12,120 |
Add: Accrued interest revenue | 60 |
Cash received | $12,180 |
Table (5)
Calculate the realized gain (loss) on sale of $40,000 bonds.
Particulars | Amount ($) |
Cash proceeds from sale of $12,000 bonds
| 12,120 |
Cost of bonds sold | (12,000) |
Gain (loss) on sale of bonds | $120 |
Table (6)
Prepare journal entry to record the interest revenue received from Company G bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
Year 1 | |||||
November | 1 | Cash | 840 | ||
Interest Receivable | 70 | ||||
Interest Revenue | 770 | ||||
(To record receipt of interest revenue) |
Table (7)
Explanation:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest received from Company G.
Prepare journal entry for accrued interest.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
Year 1 | |||||
December | 31 | Interest Receivable | 1,950 | ||
Interest Revenue | 1,950 | ||||
(To record interest accrued) |
Table (8)
Explanation:
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Prepare journal entry for accrued interest.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
Year 1 | |||||
December | 31 | Interest Receivable | 280 | ||
Interest Revenue | 280 | ||||
(To record interest accrued) |
Table (9)
Explanation:
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Prepare journal entry to record the interest revenue received from Company SB bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
Year 2 | |||||
February | 1 | Cash | 2,340 | ||
Interest Receivable | 1,950 | ||||
Interest Revenue | 390 | ||||
(To record receipt of interest revenue) |
Table (9)
Explanation:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest received from Company SB.
Prepare journal entry to record the interest revenue received from Company G bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
Year 2 | |||||
May | 1 | Cash | 840 | ||
Interest Receivable | 280 | ||||
Interest Revenue | 560 | ||||
(To record receipt of interest revenue) |
Table (10)
Explanation:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest received from Company G.
(2)
To explain: The impact of bonds, if the portfolio is classified as available-for-sale investment
(2)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Solution:
Available-for-sale investments are reported at fair value. If the bond portfolio is classified as available-for-sale investment, the bond portfolio should be reported at fair value. The changes in the cost and fair value would be adjusted using the valuation account and unrealized gain (loss) account.
Want to see more full solutions like this?
Chapter 15 Solutions
Accounting
- Transfer between Categories On December 31, 2018, Leslie Company held an investment in bonds of Kaufmann Company which it categorized as being held to maturity. At that time, the 8%, 100,000 face value bonds had a carrying value of 107,023.56 and were being amortized using the effective interest method based on a market rate of 7%. Interest on these bonds is paid annually each December 31. On December 31, 2019, after recording the interest earned, Leslie decided to reclassify the Kaufmann bonds to its available-for-sale category in anticipation of a major restructuring. At that time, the ending quoted market price for the bonds was 105,000. Required: Prepare the journal entries on December 31, 2019, to record the interest earned and the reclassification.arrow_forwardWhirlie Inc. issued $300,000 face value, 10% paid annually, 10-year bonds for $319,251 when the market of interest was 9%. The company uses the effective-interest method of amortization. At the end of the year, the company will record ________. A. a credit to cash for $28,733 B. a debit to interest expense for $31,267 C. a debit to Discount on Bonds Payable for $1,267 D. a debit to Premium on Bonds Payable for $1.267arrow_forward
- Financial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningExcel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage Learning
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax CollegeCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,
![Text book image](https://www.bartleby.com/isbn_cover_images/9781305088436/9781305088436_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337788281/9781337788281_smallCoverImage.jpg)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781111581565/9781111581565_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337794756/9781337794756_smallCoverImage.gif)