Chapter 15, Problem 1PA

(1)

To determine

Journalize the bond investment transactions in the books of G Industries.

Explanation of Solution

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.

Prepare journal entry for purchase of $75,000 bonds of Company A, at face amount with an accrued interest of $875.

Date		Account Titles and Explanations	Post. Ref.	Debit ($)	Credit ($)
2016
May	1	Investments–Company A Bonds		75,000
		Interest Receivable		875
		Cash			75,875
		(To record purchase of Company A bonds for cash)

Table (1)

• ■ Investments–Company A 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 $60,000 bonds of Company C, at face amount with an accrued interest of $150.

Date		Account Titles and Explanations	Post. Ref.	Debit ($)	Credit ($)
2016
May	16	Investments–Company C Bonds		60,000
		Interest Receivable		150
		Cash			60,150
		(To record purchase of Company C bonds for cash)

Table (2)

• ■ Investments–Company C 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 A bonds.

Date		Account Titles and Explanations	Post. Ref.	Debit ($)	Credit ($)
2016
September	1	Cash		2,625
		Interest Receivable			875
		Interest Revenue			1,750
		(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 A.

$\begin{array}{c}\text{Interest received = }\left\{\begin{array}{l}\text{Amount of debt investment × }\\ \text{Rate of interest}\times \\ \text{Time period}\end{array}\right\}\\ \text{= \$75,000×7\%}\times \frac{6}{12}\\ \text{= \$2,625}\end{array}$

Prepare journal entry for $30,000 bonds of Company A sold at 98%, with an accrued interest of $175.

Date		Account Titles and Explanations	Post. Ref.	Debit ($)	Credit ($)
2016
September	30	Cash		29,575
		Loss on Sale of Investments		600
		Interest Revenue			175
		Investments–Company A Bonds			30,000
		(To record sale of bonds)

Table (4)

• ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• ■ Loss on Sale of Investments is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• ■ Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
• ■ Investments–Company A 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  $30,000 bonds $\left(\text{\$30,000×98\%}\right)$	29,400
Add: Accrued interest revenue	175
Cash received	$29,575

Table (5)

Calculate the realized gain (loss) on sale of $30,000 bonds.

Particulars	Amount ($)
Cash proceeds from sale of  $30,000 bonds $\left(\text{\$30,000×98\%}\right)$	29,400
Cost of bonds sold	(30,000)
Gain (loss) on sale of bonds	$(600)

Table (6)

Prepare journal entry to record the interest revenue received from Company C bonds.

Date		Account Titles and Explanations	Post. Ref.	Debit ($)	Credit ($)
2016
November	1	Cash		1,800
		Interest Receivable			150
		Interest Revenue			1,650
		(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 C.

$\begin{array}{c}\text{Interest received = }\left\{\begin{array}{l}\text{Amount of debt investment × }\\ \text{Rate of interest}\times \\ \text{Time period}\end{array}\right\}\\ \text{= \$60,000×6\%}\times \frac{6}{12}\\ \text{= \$1,800}\end{array}$

Prepare journal entry for accrued interest on Company A bonds.

Date		Account Titles and Explanations	Post. Ref.	Debit ($)	Credit ($)
2016
December	31	Interest Receivable		1,050
		Interest Revenue			1,050
		(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 C bonds.

Date		Account Titles and Explanations	Post. Ref.	Debit ($)	Credit ($)
2016
December	31	Interest Receivable		600
		Interest Revenue			600
		(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 to record the interest revenue received from Company A bonds.

Date		Account Titles and Explanations	Post. Ref.	Debit ($)	Credit ($)
2017
May	1	Cash		1,575
		Interest Receivable			1,050
		Interest Revenue			525
		(To record receipt of interest revenue)

Table (9)

• ■ 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 A.

$\begin{array}{c}\text{Interest accrued = }\left\{\begin{array}{l}\left(\begin{array}{l}\text{Amount of debt investment bought–}\\ \text{Amount of debt investment sold}\end{array}\right)\text{ × }\\ \text{Rate of interest}\times \text{Time period }\end{array}\right\}\\ \text{= }\left(\text{\$75,000–\$30,000}\right)\text{×7\%}\times \frac{6}{12}\\ \text{= \$1,575}\end{array}$

Prepare journal entry to record the interest revenue received from Company C bonds.

Date		Account Titles and Explanations	Post. Ref.	Debit ($)	Credit ($)
2017
May	1	Cash		1,800
		Interest Receivable			600
		Interest Revenue			1,200
		(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 C.

$\begin{array}{c}\text{Interest received = }\left\{\begin{array}{l}\text{Amount of debt investment × }\\ \text{Rate of interest}\times \\ \text{Time period}\end{array}\right\}\\ \text{= \$60,000×6\%}\times \frac{6}{12}\\ \text{= \$1,800}\end{array}$

To determine

(2)

Explain the impact of bonds, if the portfolio is classified as available-for-sale investment.

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.