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.

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.

$\begin{array}{c}\text{Interest received = }\left\{\begin{array}{l}\text{Amount of debt investment × }\\ \text{Rate of interest}\times \\ \text{Time period}\end{array}\right\}\\ \text{= \$120,000×5\%}\times \frac{6}{12}\\ \text{= \$3,000}\end{array}$

(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 $\left(\text{\$60,000×101\%}\right)$	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 $\left(\text{\$60,000×101\%}\right)$	60,600
Cost of bonds sold	(60,000)
Gain (loss) on sale of bonds	$600

Table (5)