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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Entries for investment in bonds, interest and sale of bonds

Gonzalez Company acquired $200,000 of Walker Co., 6% bonds on May 1 at their face amount. Interest is paid semiannually on May 1 and November 1. On November 1, Gonzalez Company sold $70,000 of the bonds for 97.

Journalize entries to record the following in Year 1:

a. The initial acquisition of the bonds on May 1.

b. The semiannual interest received on November 1.

c. The sale of the bonds on November 1.

d. The accrual of $1,300 interest on December 31.

To determine

Bond investment: Bond investments are debt securities which pay a fixed interest revenue to the investor.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

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 G

Explanation

(a)

Prepare journal entry for purchase of $200,000 6% bonds of Company W at face value.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
May 1 Investments–Company W Bonds   200,000  
             Cash     200,000
    (To record purchase of Company W bonds for cash)      

Table (1)

Explanation:

  • Investments–Company W Bonds is an asset account. Since bonds investments are purchased, 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.

(b)

Prepare journal entry to record the semiannual interest revenue received.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
November 1 Cash   12,000  
             Interest Revenue     12,000
    (To record receipt of interest revenue)      

Table (2)

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.

Working Notes:

Compute amount of interest received from Company W.

Interest received = {Amount of debt investment × Rate of interest×Time period}= $200,000×6%×612= $12,000

(c)

Prepare journal entry for $70,000 bonds of Company W sold at 97%.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
November 1 Cash   67,900  
    Loss on Sale of Investments   2,100  
             Investments–Company W Bonds     70,000
    (To record sale of Company W bonds)      

Table (3)

Explanation:

  • Cash is an asset account

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