Chapter C, Problem 5E

To determine

Investment:

It is a financial term which refers to spend or deposit money to get the financial benefits.

The different ways in which a firm can invest are mentioned below:

• Long-term investments
• Short-term investments

Short-term investments:

It includes such investments which are highly liquid in nature as these can be convert in form of cash easily during the period of 1 year.

Journal Entry:

It means record of financial data related to business transactions in a journal in a manner so that debit equals credit. It provides an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.

Rules of Journal Entry:

The rules for journal entry are defined by 5 accounting components,

• Assets: Increase in asset should be debit and decrease should be credit.
• Liabilities: Increase in liabilities should be credit and decrease should be debit.
• Equity: Increase in Equity should be credit and decrease should be debit.
• Expense: Increase in expense should be debit and decrease should be credit.
• Revenue: Increase in revenue should be credit and decrease should be debit.

a.

To prepare: Journal entry for short-term investment.

b.

To determine

To prepare: Journal entry to record interest on short-term investment.