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Rekya Mart Inc. is a general merchandise retail company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Rekya Mart Inc., which has a fiscal year ending on December 31: Instructions 1. Journalize the entries to record these transactions. 2. If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure?

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 15, Problem 1PB
Textbook Problem
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Rekya Mart Inc. is a general merchandise retail company that began operations on January 1, Year 1. The following transactions relate to debt investments acquired by Rekya Mart Inc., which has a fiscal year ending on December 31:

Chapter 15, Problem 1PB, Rekya Mart Inc. is a general merchandise retail company that began operations on January 1, Year 1.

Instructions

  1. 1. Journalize the entries to record these transactions.
  2. 2. If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure?

(1)

To determine

Journalize the bond investment transactions in the books of Company RM.

Explanation of Solution

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.

Prepare journal entry for purchase of $100,000 bonds of Company SB, at face amount with an accrued interest of $900.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
April1Investments–Company SB Bonds 90,000 
  Interest Receivable 900 
           Cash  90,900
  (To record purchase of Company SB bonds for cash)   

Table (1)

  • 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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
May16Investments–Company G Bonds 42,000 
  Interest Receivable 70 
           Cash  42,070
  (To record purchase of Company G bonds for cash)   

Table (2)

  • 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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
August1Cash 2,700 
           Interest Receivable  900
           Interest Revenue  1,800
  (To record receipt of interest revenue)   

Table (3)

  • 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.

Interest received = {Amount of debt investment × Rate of interest×Time period}= $90,000×6%×612= $2,700

Prepare journal entry for $12,000 bonds of Company SB sold at 101%, with an accrued interest of $60.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
September1Cash 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)

  • 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.

ParticularsAmount ($)
Cash proceeds from sale of  $12,000 bonds ($12,000×101%)12,120
Add: Accrued interest revenue60
Cash received$12,180

Table (5)

Calculate the realized gain (loss) on sale of $40,000 bonds.

ParticularsAmount ($)
Cash proceeds from sale of  $12,000 bonds ($12,000×101%)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.

DateAccount Titles and ExplanationsPost. Ref

(2)

To determine

Explain the impact of bonds, if the portfolio is classified as available-for-sale investment.

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Financial Accounting
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