Question

The following bond investment transactions were completed during 2016 by Starks Company:

Jan. 31 Purchased 75, $1,000 government bonds at 100 plus 30 days’ accrued interest. The bonds pay 6% annual interest on July 1 and January 1.
July 1 Received semiannual interest on bond investment.
Aug. 29 Sold 35, $1,000 bonds at 98 plus $350 accrued interest.
Required:

a. Journalize the entries for these transactions. Refer to the Chart of Accounts for exact wording of account titles. Assume a 360-day year.
b. Provide the December 31, 2016, adjusting journal entry for semiannual interest earned on the bonds.

Answer 1

Answer:

31st Jan 2016

Dr Bond Receivable        75,000

Dr Interest Receivable    375

Cr Cash                            75,375

(to record the bond purchase)

* working note: Bond proceed = 75 x 1,000 = 75,000; Interest receivable = 75,000 x 6% x 30/360 = 375)

1st Jul 2016

Dr Cash                             2,250

Cr Interest Income           1,875

Cr Interest Receivable     375

(to record interest receipt on bonds holding, in which 5 months of it ( 75,000 x 6% x 5/12 is recorded as Income, the other one is recorded as collection of Income earned by the bond's seller)

29th Aug 2016

Dr Cash                                          34,650

Dr Loss on bond Investment        700

Cr Interest income                        350

 Cr Bond Receivable                    35,000

( to record the Sold 35, $1,000 bonds at 98% plus $350 accrued interest = 35,000 x 98% + 350 = 34,650)

31st Dec 2016

Dr Interest Receivable                1,200

Cr Interest Income                      1,200

( to record the interest earned on 40,000 bonds outstanding)

Explanation: