Question

On November 1, 2018, Reid Corporation acquired bonds with a face value of $700,000 for $673,618.61. The bonds carry a stated rate of interest of 10%, were purchased to yield 11%, pay interest semiannually on April 30 and October 31, were purchased to be held to maturity, and are due October 31, 2022. On November 1, 2019, in contemplation of a major acquisition, the bonds were sold for $700,000. Reid is on a fiscal year accounting period ending October 31 and uses the effective interest method.
Required:
Prepare journal entries to record the purchase of the bonds, the interest receipts on April 30, 2016, and October 31, 2016, and the sale of the bonds.
Prepare journal entries to record the purchase of the bonds, the interest receipts on April 30, 2016, and October 31, 2016, and the sale of the bonds. Additional Instructions
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GENERAL JOURNAL
DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT
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Answer 1

Answer and Explanation:

The journal entries are shown below:

On Nov 1

Investment in held to maturity debt securities Dr $673,618.61

        To Cash $673,618.61

(Being cash paid is recorded)

On April 30

Cash  $35,000

Investment in held to maturity debt securities Dr $2,049.02

           To interest revenue  $37,049.02

(Being interest revenue is recorded)

On Oct 31

Cash  $35,000

Investment in held to maturity debt securities Dr $2,161.72

           To interest revenue  $37,161.72

(Being interest revenue is recorded)

On 1 Nov

Cash Dr $700,000

     To Investment in held to maturity debt securities $677,829.35

      To Gain on sale of securities $22,170.65

(Being cash receipt is recorded)

Working note

Date           Cash           Interest    Investment in debt  Debt carrying value

                   Debit          Credit      Debit            

Nov 1                                                                                  $673,618.61

April 30      $35,000     $37,049.02   $2,049.02            $675,667.63

                                ($673,618.61 × 11% ÷ 2)

Oct 30        $35,000    $37,161.72        $2,161.72           $677,829.35

                               ($675,667.63 × 11% ÷ 2)