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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.

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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 2E
Textbook Problem
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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:

  1.     a.          The initial acquisition of the Murphy Corp. bonds on October 1, Year 1.
  2.     b.          The adjusting entry for three months of accrued interest earned on the Murphy Corp. bonds on December 31, Year 1.
  3.     c.          The receipt of semiannual interest on April 1, Year 2.
  4.     d.          The sale of $60,000 of Murphy Corp. bonds on April 1, Year 2, at 102.

To determine

Journalize the bond investment transactions in the books of T Investments.

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.

(a)

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

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
October1Investments–Corporation M Bonds 160,000 
           Cash  160,000
  (To record purchase of bonds for cash)   

Table (1)

  • 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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
December31Interest Receivable 2,000 
           Interest Revenue  2,000
  (To record interest accrued)   

Table (2)

  • 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.

DateAccount Titles and ExplanationsPost

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Chapter 15 Solutions

Financial Accounting
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