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Financial Accounting

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

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 15, Problem 4E
Textbook Problem
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The following bond investment transactions were completed during a recent year by Starks Company:

Chapter 15, Problem 4E, The following bond investment transactions were completed during a recent year by Starks Company:

  1.     a.          Journalize the entries for these transactions.
  2.     b.          Provide the December 31, Year 1, adjusting journal entry for semiannual interest earned on the bonds.

(a)

To determine

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

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 75 $1,000 government bonds at 100% with an accrued interest of $375.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
January31Investments–G Bonds 75,000 
  Interest Receivable 375 
           Cash  75,375
  (To record purchase of government bonds for cash)   

Table (1)

  • 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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
July1Cash 2,250 
           Interest Receivable  375
           Interest Revenue  1,875
  (To record receipt of interest revenue)   

Table (2)

  • 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

(b)

To determine

Prepare journal entry for accrued semiannual interest on December 31.

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Chapter 15 Solutions

Financial Accounting
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