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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

Bocelli Co. purchased $ 120,000 of 6%, 20-year Sanz County bonds on May 11, Year 1, directly from the county, at their face amount plus accrued interest. The bonds pay semiannual interest on April 1 and October 1. On October 31, Year 1, Bocelli Co. sold $30,000 of the Sanz. County bonds at 99 plus $150 accrued interest less a $100 brokerage commission.

 Provide journal entries for the following:

a. The purchase of the bonds on May 11 plus 40 days of accrued interest.

b. Semiannual interest on October 1.

c. Sale of the bonds on October 31.

d. Adjusting entry for accrued interest of $1,365 on December 31, Year 1.

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 Corporation B

Explanation

(a)

Prepare journal entry for purchase of $120,000 6% bonds of County S at face value with an accrued interest for 40 days.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
May 11 Investments–County S Bonds   120,000  
    Interest Receivable   800  
             Cash     120,800
    (To record purchase of bonds for cash)      

Table (1)

Explanation:

  • Investments–County S 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.

Working Notes:

Compute amount of interest accrued for 40 days.

Interest accrued = {Amount of debt investment × Rate of interest×Time period}``= $120,000×6%×40 days360 days= $800

(b)

Prepare journal entry to record the interest revenue received.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
October 1 Cash   3,600  
             Interest Receivable     800
             Interest Revenue     2,800
    (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 Receivable is an asset account. Since interest accrued on May 11 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 County S bonds.

Interest received = {Amount of debt investment × Rate of interest×Time period}= $120,000×6%×612= $3,600

(c)

Prepare journal entry for $30,000 bonds sold at 99%, with an accrued interest of $150 and a brokerage of $100

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