BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

Solutions

Chapter
Section
BuyFindarrow_forward

Accounting

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

Entries for investments in bonds, interest, and sale of bonds

Torres Investments acquired $160,000 of Murphy Corp., 5% bonds at their face amount on October 1, Year 1. The bonds pay interest on October 1 and April 1. On April 1, Year 2, Torres sold $60,000 of Murphy Corp. bonds at 102.

Journalize the entries to record the following:

a. The initial acquisition of the Murphy Corp. bonds on October 1, Year 1.

b. The adjusting entry for three months of accrued interest earned on the Murphy Corp. bonds on December 31, Year 1.

c. The receipt of semiannual interest on April 1, Year 2.

d. The sale of $60,000 of Murphy Corp. bonds on April 1, Year 2, at 102.

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 T Investments

Explanation

(a)

Prepare journal entry for purchase of $160,000 5% bonds of Corporation M at face value.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
October 1 Investments–Corporation M Bonds   160,000  
             Cash     160,000
    (To record purchase of bonds for cash)      

Table (1)

Explanation:

  • Investments–Corporation M 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 for accrued interest.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
December 31 Interest Receivable   2,000  
             Interest Revenue     2,000
    (To record interest accrued)      

Table (2)

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.

Working Notes:

Compute amount of interest accrued on December 31, Year 1.

Interest accrued = {Amount of debt investment× Rate of interest×Time period (October 1 to December 31)}= $160,000×5%×312= $2,000

(c)

Prepare journal entry to record the interest revenue received.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
April 1 Cash   4,000  
             Interest Receivable     2,000
             Interest Revenue     2,000
    (To record receipt of interest revenue)      

Table (3)

Explanation:

  • Cash is an asset account

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Describe business marketing

MKTG 12:STUDENT ED.-TEXT

INFLATION Due to a recession, expected inflation this year is only 3%. However, the inflation rate in Year 2 an...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)