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Entries for investment in bonds, interest and sale of bonds The following bond investment transactions were completed during a recent year by Starks Company: Year 1 Jan. 31. Purchased 75, $1,000 government bonds at 100 plus accrued interest of $375 (one month). The bonds pay 6% annual interest on July 1 and January 1. July 1. Received semiannual interest on bond investment. Aug. 30. Sold 35, $1,000 bonds at 98 plus $350 accrued interest (two months). a. Journalize the entries for these transactions. b. Provide the December 31, Year 1, adjusting journal entry for semiannual interest earned on the bonds.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 15, Problem 15.4EX
Textbook Problem

Entries for investment in bonds, interest and sale of bonds

The following bond investment transactions were completed during a recent year by Starks Company:

Year 1  
Jan. 31. Purchased 75, $1,000 government bonds at 100 plus accrued interest of $375 (one month). The bonds pay 6% annual interest on July 1 and January 1.
July 1. Received semiannual interest on bond investment.
Aug. 30. Sold 35, $1,000 bonds at 98 plus $350 accrued interest (two months).

a. Journalize the entries for these transactions.

b. Provide the December 31, Year 1, adjusting journal entry for semiannual interest earned on the bonds.

Expert Solution

(a)

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 S

Explanation of Solution

Prepare journal entry for purchase of 75 $1,000 government bonds at 100% with an accrued interest of $375.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 31 Investments–G Bonds   75,000  
    Interest Receivable   375  
             Cash     75,375
    (To record purchase of government bonds for cash)      

Table (1)

Explanation:

  • Investments–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.

Working Notes:

Compute cost of government bonds.

Cost of bonds = (Number of bonds purchased× Price per bond)(75 bonds ×$1,000)= $75,000

Prepare journal entry to record the interest revenue received.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
July 1 Cash   2,250  
             Interest Receivable     375
             Interest Revenue     1,875
    (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 January 31 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.

Interest received = {Amount of debt investment × Rate of interest×Time period}= $75,000×6%×612= $2,250

Prepare journal entry for 35 $1,000 bonds sold at 98%, with an accrued interest of $350

Expert Solution

(b)

To determine

To Prepare: journal entry for accrued semiannual interest on December 31.

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