Accounting (Text Only)
Accounting (Text Only)
26th Edition
ISBN: 9781285743615
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 15, Problem 15.1BPR
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.

(1)

To journalize: The bond investment transactions in the books of Company RM

Expert Solution
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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.

Interest received = {Amount of debt investment × Rate of interest×Time period}= $90,000×6%×612= $2,700

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 ($12,000×101%) 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 ($12,000×101%) 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.

Interest received = {Amount of debt investment × Rate of interest×Time period}= $42,000×4%×612= $840

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.

Interest accrued = {(Amount of debt investment bought–Amount of debt investment sold) × Rate of interest×Time period }($90,000–$12,000)×6%×612= $2,340

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.

Interest received = {Amount of debt investment × Rate of interest×Time period}= $42,000×4%×612= $840

(2)

To determine

To explain: The impact of bonds, if the portfolio is classified as available-for-sale investment.

(2)

Expert Solution
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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)

Ch. 15 - Prob. 15.1APECh. 15 - Bond investment transactions Journalize the...Ch. 15 - Prob. 15.2APECh. 15 - Stock investment transactions On September 12,...Ch. 15 - Prob. 15.3APECh. 15 - Prob. 15.3BPECh. 15 - Prob. 15.4APECh. 15 - Prob. 15.4BPECh. 15 - Prob. 15.5APECh. 15 - Prob. 15.5BPECh. 15 - Prob. 15.6APECh. 15 - Prob. 15.6BPECh. 15 - Prob. 15.1EXCh. 15 - Prob. 15.2EXCh. 15 - Prob. 15.3EXCh. 15 - Prob. 15.4EXCh. 15 - Prob. 15.5EXCh. 15 - Entries for investment in stock, receipt of...Ch. 15 - Prob. 15.7EXCh. 15 - Prob. 15.8EXCh. 15 - Entries for stock investments, dividends, and sale...Ch. 15 - Prob. 15.10EXCh. 15 - Prob. 15.11EXCh. 15 - Prob. 15.12EXCh. 15 - Prob. 15.13EXCh. 15 - Prob. 15.14EXCh. 15 - Prob. 15.15EXCh. 15 - Prob. 15.16EXCh. 15 - Fair value journal entries, trading investments...Ch. 15 - Prob. 15.18EXCh. 15 - Prob. 15.19EXCh. 15 - Prob. 15.20EXCh. 15 - Prob. 15.21EXCh. 15 - Prob. 15.22EXCh. 15 - Prob. 15.23EXCh. 15 - Prob. 15.24EXCh. 15 - Prob. 15.25EXCh. 15 - Prob. 15.26EXCh. 15 - Prob. 15.27EXCh. 15 - Prob. 15.28EXCh. 15 - Prob. 15.29EXCh. 15 - Prob. 15.1APRCh. 15 - Prob. 15.2APRCh. 15 - Stock Investment transaction, equity method and...Ch. 15 - Prob. 15.4APRCh. 15 - Prob. 15.1BPRCh. 15 - Prob. 15.2BPRCh. 15 - Stock investment transactions, equity method and...Ch. 15 - Prob. 15.4BPRCh. 15 - Selected transactions completed by Equinox...Ch. 15 - Benefits of fair value On July 16, 1998, Wyatt...Ch. 15 - International fair value accounting International...Ch. 15 - Prob. 15.3CPCh. 15 - Warren Buffett and "look-through" earnings...Ch. 15 - Prob. 15.5CP
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