Bond investment: Bond investments are debt securities which pay a fixed interest revenue to the investor.
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.
(1)
To journalize: The bond investment transactions in the books of Company RM
Explanation of Solution
Prepare journal entry for purchase of $100,000 bonds of Company SB, at face amount with an accrued interest of $900.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
April | 1 | Investments–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 G, at face amount with an accrued interest of $700.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
May | 16 | Investments–Company G Bonds | 42,000 | ||
Interest Receivable | 70 | ||||
Cash | 42,070 | ||||
(To record purchase of Company G bonds for cash) |
Table (2)
- Investments–Company G Bonds is an asset account. Since bonds investments are purchased, asset value increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Prepare journal entry to record the interest revenue received from Company SB bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
August | 1 | Cash | 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.
Prepare journal entry for $12,000 bonds of Company SB sold at 101%, with an accrued interest of $60.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
September | 1 | Cash | 12,180 | ||
Interest Revenue | 60 | ||||
Gain on Sale of Investments | 120 | ||||
Investments–Company SB Bonds | 12,000 | ||||
(To record sale of Company SB bonds) |
Table (4)
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
- Gain on Sale of Investments is an income account. Since income increases equity, equity value is increased, and an increase in equity is credited.
- Investments–Company SB Bonds is an asset account. Since bond investments are sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Calculate the cash received from the sale of bonds.
Particulars | Amount ($) |
Cash proceeds from sale of $12,000 bonds |
12,120 |
Add: Accrued interest revenue | 60 |
Cash received | $12,180 |
Table (5)
Calculate the realized gain (loss) on sale of $40,000 bonds.
Particulars | Amount ($) |
Cash proceeds from sale of $12,000 bonds |
12,120 |
Cost of bonds sold | (12,000) |
Gain (loss) on sale of bonds | $120 |
Table (6)
Prepare journal entry to record the interest revenue received from Company G bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
November | 1 | Cash | 840 | ||
Interest Receivable | 70 | ||||
Interest Revenue | 770 | ||||
(To record receipt of interest revenue) |
Table (7)
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest received from Company G.
Prepare journal entry for accrued interest on Company SB bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
December | 31 | Interest Receivable | 1,950 | ||
Interest Revenue | 1,950 | ||||
(To record interest accrued) |
Table (8)
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Prepare journal entry for accrued interest on Company G bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
December | 31 | Interest Receivable | 280 | ||
Interest Revenue | 280 | ||||
(To record interest accrued) |
Table (9)
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Prepare journal entry to record the interest revenue received from Company SB bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
February | 1 | Cash | 2,340 | ||
Interest Receivable | 1,950 | ||||
Interest Revenue | 390 | ||||
(To record receipt of interest revenue) |
Table (10)
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest received from Company SB.
Prepare journal entry to record the interest revenue received from Company G bonds.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
May | 1 | Cash | 840 | ||
Interest Receivable | 280 | ||||
Interest Revenue | 560 | ||||
(To record receipt of interest revenue) |
Table (11)
- 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 G.
(2)
To explain: The impact of bonds, if the portfolio is classified as available-for-sale investment.
(2)
Explanation of Solution
Available-for-sale investments are reported at fair value. If the bond portfolio is classified as available-for-sale investment, the bond portfolio should be reported at fair value. The changes in the cost and fair value would be adjusted using the valuation account and unrealized gain (loss) account.
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Chapter 15 Solutions
Accounting (Text Only)
- Saverin, Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin, Inc. issued 62,500,000 of 10-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of 66,747,178. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2016.arrow_forwardAggies Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018, and received $540,000. Interest is payable semi-annually. The premium is amortized using the straight-line method. Prepare journal entries for the following transactions. A. July 1, 2018: entry to record issuing the bonds B. Dec. 31, 2018: entry to record payment of interest to bondholders C. Dec. 31, 2018: entry to record amortization of premiumarrow_forwardDixon Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $480,000. Interest is payable annually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions. A. July 1, 2018: entry to record issuing the bonds B. June 30, 2019: entry to record payment of interest to bondholders C. June 30, 2019: entry to record amortization of discount D. June 30, 2020: entry to record payment of interest to bondholders E. June 30, 2020: entry to record amortization of discountarrow_forward
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