Chapter 14, Problem 14.6P

(1) (a)

To determine

Bonds

Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.

Straight line amortization bond

Straight line method of amortization is a process of amortizing premium on bond or discount on bond, which allocates the same amount of interest expense in each period of interest payment.

Adjusting entries

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

To Prepare: The journal entry to record the issuance of bonds by Incorporation WC (Issuer).

Explanation of Solution

Prepare journal entry to record issuance of bonds by Incorporation WC (Issuer) on April 1, 2016 as shown below:

Date		Account Title and Explanation	Debit ($)	Credit ($)
2016		Cash	29,600,000
April	1
		Discount on Bonds Payable	700,000
		Bonds Payable		30,000,000
		Interest Payable		300,000
		(To record the issuance of bonds)

Table (1)

Working notes:

Calculate the interest payable for 1 month (for March 2016) as shown below:

$\begin{array}{c}\text{Interest payable}=\text{Face value of bonds}\times \text{ interest rate}\times \text{Time}\\ =\$30,000,000\times \frac{12}{100}\times \frac{1}{12}\\ =\$300,000\end{array}$

Hence, interest payable amount for one month is $300,000.

Calculate the amount of cash received.

$\begin{array}{c}\text{Cash received = Issue price of bonds + Interest payable}\\ \text{= \$29,300,000 +\$300,000}\\ \text{=\$29,600,000}\end{array}$

Hence, cash received amount is $29,600,000.

Calculate the amount of discount on bonds payable as shown below:

$\begin{array}{c}\text{Discount on bonds payable = Face value of bonds – Issue price of bonds}\\ \text{= \$30,000,000 –\$29,300,000}\\ \text{=\$700,000}\end{array}$

Hence, discount on bonds payable amount is $700,000.

• Cash is a current asset, and increased. Therefore, debit cash account for $29,600,000.
• Discount on bonds payable is a contra liability, and decreased. Therefore, debit discount on bonds payable account for $700,000.
• Bonds payable is a long term liability, and increased. Therefore, credit bonds payable account for $30,000,000.
• Interest payable is a current liability, and increased. Therefore, credit interest payable account for $300,000.

1 (b)

To determine

To Prepare: The journal entry to record investment on bonds of Corporation S as on April 1, 2016.

Explanation of Solution

Prepare the journal entry to record the investment on bonds of Corporation S as on 1^st April 2016 as shown below:

Date		Account Title and Explanation	Debit ($)	Credit ($)
2016		Bonds Investment (A+)	30,000
April	1
		Interest Receivable (A+)	300
		Discount on Bonds Investment (L+)		700
		Cash (A–)		29,600
		(To record the purchase of  bonds)

Table (2)

Working notes:

Calculate the interest receivable for 1 month (for March 2016) as shown below:

$\begin{array}{c}\text{Interest receivable}=\text{Face value of bonds}\times \text{ interest rate}\times \text{Time}\\ =\$30,000\times \frac{12}{100}\times \frac{1}{12}\\ =\$300\end{array}$

Hence, interest receivable amount is $300.

Calculate the amount of cash paid as shown below:

$\begin{array}{c}\text{Cash paid = Purchases price of bonds + Interest receivable}\\ \text{= \$29,300 +\$300}\\ \text{=\$29,600}\end{array}$

Hence, cash paid amount is $29,600.

Calculate the amount of discount on bonds investment as shown below:

$\begin{array}{c}\text{Discount on bonds investment = Face value of bonds – Issue price of bonds}\\ \text{= \$30,000 –\$29,300}\\ \text{=\$700}\end{array}$

Hence, discount on bonds payable amount is $700.

• Bond investment is a non – current asset, and increased. Therefore, debit bond investment account is $30,000.
• Interest receivable is a current asset, and increased. Therefore, debit interest receivable account is $300.
• Discount on bonds investment is a contra asset, and increased. Therefore, credit discount on bonds investment account for $700.
• Cash is a current asset, and decreased. Therefore, credit cash account for $29,600.

(2 )(a)

To determine

To Prepare: The journal entry to record all subsequent events through maturity (February 28, 2019) for Incorporation WC (Issuer).

Explanation of Solution

Prepare the journal entry to record interest on August 31, 2016 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2016		Interest Expense (E–)			1,600,000
August	31	Interest Payable (L–)			300,000
			Discount on Bonds Payable (L+)			100,000
			Cash (A–)			1,800,000
				(To record payment of semi-annual interest)

Table (3)

Working notes:

Calculate discount on bonds payable per month as shown below:

$\begin{array}{c}\text{Discount on bonds payable per month}\text{= }\frac{\text{Total discount}}{\text{Number}\text{of}\text{discount}\text{periods}}\\ =\frac{\$700,000}{\text{35}\text{months}\text{(3years –1 month)}}\\ =\$20,000\end{array}$

Hence, discount on bonds payable per month is $20,000.

Calculate discount on bonds payable amount for 5 months as shown below:

$\begin{array}{c}\begin{array}{l}\text{Discount on bonds }\\ \text{payable for 5 months}\end{array})\text{ = }\left(\begin{array}{l}\text{Discount on bonds payable amount}\\ \text{ per month}\times \text{Number of months}\end{array}\right)\\ \text{\$20,000 }\times \text{ 5 months}\\ \text{= \$100,000}\end{array}$

Hence, discount on bonds payable amount for 5 months is $100,000.

Calculate the amount of cash paid as shown below:

$\begin{array}{c}\text{Cash paid}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$30,000,000\times 12\%\times \frac{6}{12}\\ =\$1,800,000\end{array}$

Hence, cash paid amount is $1,800,000.

Calculate the amount of interest expense as shown below:

$\begin{array}{c}\text{Interest expense = Cash paid + Discount on bonds payable – Interest payable}\\ =\$1,800,000+\$100,000-\$300,000\\ =\$1,600,000\end{array}$

Hence, interest expense amount is $1,600,000.

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $1,600,000.
• Interest payable is a current liability, and decreased. Therefore, debit interest payable account for $300,000.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable account for $100,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $1,800,000.

Prepare the Journal entry to record interest on December 31, 2018 as shown below:

Date		Account Title and Explanation			Debit ($)		Credit ($)
2016		Interest Expense			1,280,000
December	31		Discount on Bonds Payable			80,000
			Interest Payable			1,200,000
				(To record interest accrued)

Table (4)

Working notes:

Calculate discount on bonds payable for 4 months as shown below:

$\begin{array}{c}\text{Discount on bonds payable for 4 months =\$20,000}\times 4\text{months}\\ =\$80,000\end{array}$

Hence, discount on bonds payable for 4 months amount is $80,000.

Calculate interest payable for 4 months as shown below:

$\begin{array}{c}\text{Interest payable}=\text{Face value of bonds}\times \text{ interest rate}\times \text{Time}\text{period}\\ =\$30,000,000\times \frac{12}{100}\times \frac{4}{12}\\ =\$1,200,000\end{array}$

Hence, interest payable amount is $1,200,000.

Calculate the amount of interest expense as shown below:

$\begin{array}{c}\text{Interest expense = Discount on bonds payable + Interest payable}\\ =\$80,000-\$1,200,000\\ =\$1,280,000\end{array}$

Hence, interest expense amount is $1,280,000.

Prepare the journal entry to record interest on February 28, 2017 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2017		Interest Expense (E–)			640,000
February	28	Interest Payable (L–)			1,200,000
			Discount on Bonds Payable (L+)			40,000
			Cash (A–)			1,800,000
				(To record payment of interest)

Table (5)

Working notes:

Calculate discount on bonds payable for 2 months as shown below:

$\begin{array}{c}\text{Discount on bonds payable for 2 months =\$20,000}\times 2\text{months}\\ =\$40,000\end{array}$

Hence, discount on bonds payable for 2 months is $40,000.

Calculate the amount of interest expense as shown below:

$\begin{array}{c}\text{Interest expense = Cash paid + Discount on bonds payable – Interest payable}\\ =\$1,800,000+\$40,000-\$1,200,000\\ =\$640,000\end{array}$

Hence, interest expenses amount is $640,000.

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $640,000.
• Interest payable is a current liability, and decreased. Therefore, debit interest payable account for $1,200,000.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable account for $40,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $1,800,000.

Prepare the journal entry to record interest on August 31, 2017 as show below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2017		Interest Expense			1,920,000
August	31		Discount on Bonds Payable			120,000
			Cash			1,800,000
				(To record payment of semi-annual interest)

Table (6)

Working notes:

Calculate discount on bonds payable for 6 months as shown below:

$\begin{array}{c}\text{Discount on bonds payable for 6 months =\$20,000}\times 6\text{months}\\ =\$120,000\end{array}$

Hence, discount on bonds payable amount is $120,000.

Calculate the amount of interest expense as shown below:

$\begin{array}{c}\text{Interest expense = Cash paid +Discount on bonds payable }\\ =\$1,800,000+\$120,000\\ =\$1,920,000\end{array}$

Hence, interest expense amount is $1,920,000.

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $1,920,000.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable account for $120,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $1,800,000.

Prepare the Journal entry to record interest on December 31, 2017 as shown below:

Date		Account Title and Explanation			Post Ref		Debit ($)	Credit ($)
2017		Interest Expense					1,280,000
December	31		Discount on Bonds Payable					80,000
			Interest Payable					1,200,000
				(To record interest accrued)

Table (7)

Working notes:

Calculate the discount on bonds payable for 4 months.

$\begin{array}{c}\text{Discount on bonds payable for 4 months =\$20,000}\times 4\text{months}\\ =\$80,000\end{array}$

Hence, discount on bonds payable amount is $80,000.

Calculate interest payable for 4 months as show below:

$\begin{array}{c}\text{Interest payable}=\text{Face value of bonds}\times \text{ interest rate}\times \text{Time}\\ =\$30,000,000\times \frac{12}{100}\times \frac{4}{12}\\ =\$1,200,000\end{array}$

Hence, interest payable amount is $1,200,000.

Calculate the amount of interest expense as shown below:

$\begin{array}{c}\text{Interest expense = Discount on bonds payable + Interest payable}\\ =\$80,000-\$1,200,000\\ =\$1,280,000\end{array}$

Hence, interest expense amount is $1,280,000.

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $1,280,000.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable account for $80,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $1,800,000.

Prepare the journal entry to record interest on February 28, 2018 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2018		Interest Expense			640,000
February	28	Interest Payable			1,200,000
			Discount on Bonds Payable			40,000
			Cash			1,800,000
				(To record payment of interest)

Table (8)

Working notes:

Calculate discount on bonds payable for 2 months as show below:

$\begin{array}{c}\text{Discount on bonds payable for 2 months =\$20,000}\times 2\text{months}\\ =\$40,000\end{array}$

Hence, discount on bonds payable for 2 months is $40,000.

Calculate the amount of interest expense as shown below:

$\begin{array}{c}\text{Interest expense = Cash paid + Discount on bonds payable – Interest payable}\\ =\$1,800,000+\$40,000-\$1,200,000\\ =\$640,000\end{array}$

Hence, interest expense amount is $640,000.

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $640,000.
• Interest payable is a current liability, and decreased. Therefore, debit interest payable account for $1,200,000.
• Discount on bonds payable is a contra liability, and decreased. Therefore, credit discount on bonds payable account for $40,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $1,800,000.

Prepare the journal entry to record interest on August 31, 2020 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2018		Interest Expense			1,920,000
August	31		Discount on Bonds Payable			120,000
			Cash			1,800,000
				(To record payment of semi-annual interest)

Table (9)

Working notes:

Calculate discount on bonds payable for 6 months as shown below:

$\begin{array}{c}\text{Discount on bonds payable for 6 months =\$20,000}\times 6\text{months}\\ =\$120,000\end{array}$

Hence, discount on bonds payable for 6 months amount is $120,000.

Calculate the amount of interest expense as shown below:

$\begin{array}{c}\text{Interest expense = Cash paid +Discount on bonds payable }\\ =\$1,800,000+\$120,000\\ =\$1,920,000\end{array}$

Hence, interest expense amount is $1,920,000.

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $1,280,000.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable account for $80,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $1,800,000.

Prepare the journal entry to record interest on December 31, 2020 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2018		Interest Expense			1,280,000
December	31		Discount on Bonds Payable			80,000
			Interest Payable			1,200,000
				(To record interest expenses accrued)

Table (10)

Working notes:

Calculate discount on bonds payable for 4 months as shown below:

$\begin{array}{c}\text{Discount on bonds payable for 4 months =\$20,000}\times 4\text{months}\\ =\$80,000\end{array}$

Hence, discount on bonds payable for 4 months amount is $80,000.

Calculate interest payable for 4 months as shown below:

$\begin{array}{c}\text{Interest payable}=\text{Face value of bonds}\times \text{ interest rate}\times \text{Time}\\ =\$30,000,000\times \frac{12}{100}\times \frac{4}{12}\\ =\$1,200,000\end{array}$

Hence, interest payable amount is $1,200,000.

Calculate the amount of interest expense as shown below:

$\begin{array}{c}\text{Interest expense = Discount on bonds payable + Interest payable}\\ =\$80,000-\$1,200,000\\ =\$1,280,000\end{array}$

Hence, interest expense amount is $1,280,000.

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $1,280,000.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable account for $80,000.
• Interest payable is a current liability, and increased. Therefore, credit interest payable account for $1,200,000.

Prepare the journal entry to record interest on February 28, 2019 as shown below:

Date		Account Title and Explanation			Post Ref		Debit ($)	Credit ($)
2019		Interest Expense (E–)					640,000
February	28	Interest Payable (L–)					1,200,000
			Discount on Bonds Payable (L+)					40,000
			Cash (A–)					1,800,000
				(To record payment of interest)

Table (11)

Working notes:

Calculate discount on bonds payable for 2 months as shown below:

$\begin{array}{c}\text{Discount on bonds payable for 2 months =\$20,000}\times 2\text{months}\\ =\$40,000\end{array}$

Hence, discount on bonds payable amount is $40,000.

Calculate the amount of interest expense as shown below:

$\begin{array}{c}\text{Interest expense = Cash paid + Discount on bonds payable – Interest payable}\\ =\$1,800,000+\$40,000-\$1,200,000\\ =\$640,000\end{array}$

Hence, interest expense amount is $640,000.

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $640,000.
• Interest payable is a current liability, and decreased. Therefore, debit interest payable account for $1,200,000.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable account for $40,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $1,800,000.

Prepare the journal entry to record the retirement of the bond at maturity on February 28, 2019 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2019		Bonds Payable			30,000,000
February	28		Cash			30,000,000
				(To record the retirement of bonds)

Table (12)

Bonds payable is a long term liability, and decreased. Therefore, debit bonds payable account for $30,000,000.

Cash is a current asset, and decreased. Therefore, credit cash account for $30,000,000.

2 (b)

To determine

To Prepare: The journal entry to record all subsequent events through maturity (February 28, 2016) for Corporation S (Investor).

Explanation of Solution

Prepare the journal entry to record interest on August 31, 2016 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2016		Cash			1,800
August	31	Discount on Bonds Investment			100
			Interest Receivable			300
			Interest Revenue			1,600
				(To record semi-annual interest revenue)

Table (13)

Working notes:

Calculate discount on bonds investment for 5 months as shown below:

$\begin{array}{c}\text{Discount on bonds investment per month}\text{= }\frac{\text{Total discount}}{\text{Number}\text{of}\text{discount}\text{periods}}\\ =\frac{\$700}{\text{35}\text{months}\text{(3years –1 month)}}\\ =\$20\end{array}$

$\begin{array}{c}\text{Discount on bonds investment for 5 months = \$20 }\times \text{ 5 months}\\ \text{= \$100}\end{array}$

Hence, discount on investment bonds amount is $100.

Calculate the amount of cash received as shown below:

$\begin{array}{c}\text{Cash received}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$30,000\times 12\%\times \frac{6}{12}\\ =\$1,800\end{array}$

Hence, cash received amount is $1,800.

Calculate the amount of interest revenue as shown below:

$\begin{array}{c}\text{Interest revenue = }\left(\begin{array}{l}\text{Cash received + Discount on bonds investment}\\ \text{ – Interest receivable}\end{array}\right)\\ =\$1,800+\$100-\$300\\ =\$1,600\end{array}$

Hence, interest revenue amount is $1,600.

• Cash is a current asset, and increased. Therefore, debit cash account for $1,800.
• Discount on bond investment is a contra asset, and decreased. Therefore, debit discount on bonds investment for $100.
• Interest receivable is a current asset, and decreased. Therefore, credit interest receivable account for $300.
• Interest revenue is a component of stockholders’ equity, and increased it. Therefore, credit interest revenue account for $1,600.

Prepare the journal entry to record the interest receipt as on 31^st December 2016 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2016		Interest Receivable			1,200
December	31	Discount on Bonds Investment			80
			Interest Revenue			1,280
				(To record interest receivable)

Table (14)

Working notes:

Calculate interest receivable for 4 months as shown below:

$\begin{array}{c}\text{Interest receivable for 4 months = \$30,000}\times 12\%\times \frac{4}{12}\\ =\$1,200\end{array}$

Hence, interest receivable amount is $1,200.

Calculate discount on bonds investment for 4 months as shown below:

$\begin{array}{c}\text{Discount on bonds investment for 4 months =}\$20\times 4\text{months}\\ =\$80\end{array}$

Hence, discount on bonds investment is $80.

Calculate the interest revenue as shown below:

$\begin{array}{c}\text{Interest revenue = Interest receivable + Discount on bonds investment}\\ =\$1,200+\$80\\ =\$1,280\end{array}$

Hence, interest revenue amount is $1,280.

• Interest receivable is current asset, and increased. Therefore, debit interest receivable account for $1,200.
• Discount on bonds investment is a contra asset, and decreased. Therefore, debit discount on bonds payable account is $80.
• Interest revenue is a component of stockholders’ equity, and increased it. Therefore, credit interest revenue account for $1,280.

Prepare the journal entry to record the interest receipt on 28^th February 2017 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2017		Cash			1,800
February	28	Discount on Bonds Investment			40
			Interest Receivable			1,200
			Interest Revenue			640
				(To record interest revenue)

Table (15)

Working notes:

Calculate the amount of cash received as shown below:

$\begin{array}{c}\text{Cash received}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$30,000\times 12\%\times \frac{6}{12}\\ =\$1,800\end{array}$

Hence, cash received amount is $1,800.

Calculate the discount on bonds investment for 2 months as shown below:

$\begin{array}{c}\text{Discount on bonds investment for 2 months =}\$20\times 2\text{months}\\ =\$40\end{array}$

Hence, discount on bonds investment amount is $40.

Calculate the interest revenue as shown below:

$\begin{array}{c}\text{Interest revenue = }\left(\begin{array}{l}\text{Cash received + Discount on bonds investment }\\ \text{–}\text{Interest receivable}\end{array}\right)\\ =\$1,800+\$40-\$1,200\\ =\$640\end{array}$

Hence, interest revenue amount is $640.

• Cash is a current asset, and increased. Therefore, debit cash account for $1,800.
• Discount on bond investment is a contra asset, and decreased. Therefore, debit discount on bonds investment for $40.
• Interest receivable is a current asset, and decreased. Therefore, credit interest receivable account for $1,200.
• Interest revenue is a component of stockholders’ equity, and increased it. Therefore, credit interest revenue account for $640.

Prepare the journal entry to record the interest receipt as on 31^st August 2017 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2017		Cash			1,800
August	31	Discount on Bonds Investment			120
			Interest Revenue			1,920
				(To record semi-annual interest revenue)

Table (16)

Working notes:

Calculate the amount of cash received as shown below:

$\begin{array}{c}\text{Cash received}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$30,000\times 12\%\times \frac{6}{12}\\ =\$1,800\end{array}$

Hence, cash received amount is $1,800.

Calculate the discount on bonds investment for 6 months as shown below:

$\begin{array}{c}\text{Discount on bonds investment for 6 months =}\$20\times 6\text{months}\\ =\$120\end{array}$

Hence, discount on bonds payable amount is $120.

Calculate the interest revenue as shown below:

$\begin{array}{c}\text{Interest revenue = Cash received + Discount on bonds investment}\\ =\$1,800+\$120\\ =\$1,820\end{array}$

Hence, interest revenue amount is $1,820.

• Cash is current asset, and increased. Therefore, debit cash account for $1,800.
• Discount on bonds investment is a contra asset, and decreased. Therefore, debit discount on bonds payable account is $120.
• Interest revenue is a component of stockholders’ equity, and increased it. Therefore, credit interest revenue account for $1,920.

Date		Account Title and Explanation			Debit ($)	Credit ($)
2017		Interest Receivable			1,200
December	31	Discount on Bonds Investment			80
			Interest Revenue			1,280
				(To record interest receivable)

Table (17)

Working notes:

Calculate the interest receivable for 4 months.

$\begin{array}{c}\text{Interest receivable for 4 months = \$30,000}\times 12\%\times \frac{4}{12}\\ =\$1,200\end{array}$

Hence, interest receivable amount is $1,200.

Calculate the discount on bonds investment for 4 months

$\begin{array}{c}\text{Discount on bonds investment for 4 months =}\$20\times 4\text{months}\\ =\$80\end{array}$

Hence, discount on bonds investment amount is $80.

Calculate interest revenue:

$\begin{array}{c}\text{Interest revenue = Interest receivable + Discount on bonds investment}\\ =\$1,200+\$80\\ =\$1,280\end{array}$

Hence, interest revenue amount is $1,280.

• Interest receivable is current asset, and increased. Therefore, debit interest receivable account for $1,200.
• Discount on bonds investment is a contra asset, and decreased. Therefore, debit discount on bonds payable account is $80.
• Interest revenue is a component of stockholders’ equity, and increased it. Therefore, credit interest revenue account for $1,280.

Prepare the journal entry to record the interest receipt as on 28^th February 2018 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2018		Cash			1,800
February	28	Discount on Bonds Investment			40
			Interest Receivable			1,200
			Interest Revenue			640
				(To record interest revenue)

Table (18)

Working notes:

Calculate the amount of cash received.

$\begin{array}{c}\text{Cash received}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$30,000\times 12\%\times \frac{6}{12}\\ =\$1,800\end{array}$

Hence, cash received amount is $1,800.

Calculate discount on bonds investment for 2 months.

$\begin{array}{c}\text{Discount on bonds investment for 2 months =}\$20\times 2\text{months}\\ =\$40\end{array}$

Hence, discount on bonds investment for 2 months is $40.

Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue = }\left(\begin{array}{l}\text{Cash received + Discount on bonds investment }\\ \text{–}\text{Interest receivable}\end{array}\right)\\ =\$1,800+\$40-\$1,200\\ =\$640\end{array}$

Hence, interest revenue amount is $640.

• Cash is a current asset, and increased. Therefore, debit cash account for $1,800.
• Discount on bond investment is a contra asset, and decreased. Therefore, debit discount on bonds investment for $40.
• Interest receivable is a current asset, and decreased. Therefore, credit interest receivable account for $1,200.
• Interest revenue is a component of stockholders’ equity, and increased it. Therefore, credit interest revenue account for $640.

Date		Account Title and Explanation			Debit ($)	Credit ($)
2018		Cash			1,800
August	31	Discount on Bonds Investment			120
			Interest Revenue			1,920
				(To record semi-annual interest revenue)

Table (19)

Working notes:

Calculate the amount of cash received.

$\begin{array}{c}\text{Cash received}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$30,000\times 12\%\times \frac{6}{12}\\ =\$1,800\end{array}$

Hence, cash received amount is $1,800.

Calculate discount on bonds investment for 6 months:

$\begin{array}{c}\text{Discount on bonds investment for 6 months =}\$20\times 6\text{months}\\ =\$120\end{array}$

Hence, discount on bonds investment for 6 months amount is $120.

Calculate the interest revenue.

$\begin{array}{c}\text{Interest revenue = Cash received + Discount on bonds investment}\\ =\$1,800+\$120\\ =\$1,820\end{array}$

Hence, interest revenue amount is $1,820.

• Cash is current asset, and increased. Therefore, debit cash account for $1,800.
• Discount on bonds investment is a contra asset, and decreased. Therefore, debit discount on bonds payable account is $120.
• Interest revenue is a component of stockholders’ equity, and increased it. Therefore, credit interest revenue account for $1,920.

Prepare the journal entry to record the interest as on 31^st December 2018 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2018		Interest Receivable			1,200
December	31	Discount on Bonds Investment			80
			Interest Revenue			1,280
				(To record interest receivable)

Table (20)

Working notes:

Calculate the interest receivable for 4 months.

$\begin{array}{c}\text{Interest receivable for 4 months = \$30,000}\times 12\%\times \frac{4}{12}\\ =\$1,200\end{array}$

Hence, interest receivable amount is $1,200.

Calculate the discount on bonds investment for 4 months.

$\begin{array}{c}\text{Discount on bonds investment for 4 months =}\$20\times 4\text{months}\\ =\$80\end{array}$

Hence, discount on bonds investment amount is $80.

Calculate the interest revenue.

$\begin{array}{c}\text{Interest revenue = Interest receivable + Discount on bonds investment}\\ =\$1,200+\$80\\ =\$1,280\end{array}$

Hence, interest revenue amount is $1,280.

• Interest receivable is current asset, and increased. Therefore, debit interest receivable account for $1,200.
• Discount on bonds investment is a contra asset, and decreased. Therefore, debit discount on bonds payable account is $80.
• Interest revenue is a component of stockholders’ equity, and increased it. Therefore, credit interest revenue account for $1,280.

Prepare the journal entry to record the interest as on 28^th February 2019 as shown below:

Date		Account Title and Explanation			Debit ($)	Credit ($)
2019		Cash			1,800
February	28	Discount on Bonds Investment			40
			Interest Receivable			1,200
			Interest Revenue			640
				(To record interest revenue)

Table (21)

Working notes:

Calculate the amount of cash received.

$\begin{array}{c}\text{Cash received}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$30,000\times 12\%\times \frac{6}{12}\\ =\$1,800\end{array}$

Hence, cash received amount is $1,800.

Calculate the discount on bonds investment for 2 months.

$\begin{array}{c}\text{Discount on bonds investment for 2 months =}\$20\times 2\text{months}\\ =\$40\end{array}$

Hence, discount on bonds investment amount is $40.

Calculate the interest revenue.

$\begin{array}{c}\text{Interest revenue = }\left(\begin{array}{l}\text{Cash received + Discount on bonds investment }\\ \text{–}\text{Interest receivable}\end{array}\right)\\ =\$1,800+\$40-\$1,200\\ =\$640\end{array}$

Hence, interest revenue amount is $640.

• Cash is a current asset, and increased. Therefore, debit cash account for $1,800.
• Discount on bond investment is a contra asset, and decreased. Therefore, debit discount on bonds investment for $40.
• Interest receivable is a current asset, and decreased. Therefore, credit interest receivable account for $1,200.
• Interest revenue is a component of stockholders’ equity, and increased it. Therefore, credit interest revenue account for $640.

Date		Account Title and Explanation			Debit ($)	Credit ($)
2019		Cash (A+)			30,000
February	28		Bonds Investment (A–)			30,000
				(To record the retirement of bonds)

Table (22)

• Cash is a current asset, and increased. Therefore, debit cash account for $30,000.
• Bonds investment is a non – current asset, and decreased. Therefore, credit bond investment account for $30,000.