BuyFind

Corporate Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305653535
BuyFind

Corporate Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305653535

Solutions

Chapter
Section
Chapter D, Problem D.1EX
Textbook Problem

Bond investment transactions

Journalize the entries to record the following circled bond investment transactions for Starks Products:

A. Purchased for cash $120,000 of Iceline.inc, 5% bonds at 100 plus accrued interest of $1,000.

B    Received first semiannual interest payment

C. Sold $60,000 of the bonds at 101 plus accrued interest of $505.

Expert Solution
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 of S Products.

Explanation of Solution

(a)

Prepare journal entry for purchase of $120,000, 5% bonds of I Incorporation at 100% with an accrued interest of $1,000.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
    Investments–I Incorporation   120,000  
    Interest Receivable   1,000  
             Cash     121,000
    (To record purchase of M City bonds for cash)      

Table (1)

  • Investments–I Incorporation 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.

(b)

Prepare journal entry to record the interest revenue received.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
    Cash   3,000  
             Interest Receivable     1,000
             Interest Revenue     1,000
    (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 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 I Incorporation.

Interest received = {Amount of debt investment × Rate of interest×Time period}= $120,000×5%×612= $3,000

(c)

Prepare journal entry for $60,000 bonds of I International sold at 101%, with an accrued interest of $100.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
    Cash   61,100  
             Interest Revenue     500
             Gain on Sale of Investments     600
             Investments–I Incorporation     60,000
    (To record sale of I Incorporation bonds)      

Table (3)

  • 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 a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
  • Investments–I Incorporation 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.

Particulars Amount ($)
Cash proceeds from sale of  $60,000 bonds ($60,000×101%) 60,600
Add: Accrued interest revenue 500
Cash received $61,100

Table (4)

Calculate the realized gain (loss) on sale of $60,000 bonds.

Particulars Amount ($)
Cash proceeds from sale of  $60,000 bonds ($60,000×101%) 60,600
Cost of bonds sold (60,000)
Gain (loss) on sale of bonds $600

Table (5)

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