The following are selected bond investment transactions for Madison Inc.
-Purchased for cash $270,000 of Meriweather Co. 7% bonds at 100 plus accrued interest of $3,150.
-Received first semiannual interest.
-Sold $180,000 of the bonds at 102 plus accrued interest of $2,250.
Instructions: Prepare journal entries to record the preceding transactions.
Bonds are long-term debt instruments which provide companies with additional capital and investors with a low-risk investment opportunity. Bonds are characterized by their principal balance and interest rate. The principal balance must be repaid on the bond's due date while interest is typically paid over time.
Answer and Explanation:
|#1||Bonds Receivable||$270,000||Record bonds at face value|
|Interest Receivable||$3,150||Record accrued interest to date|
|Cash||$273,150||Record outflow of cash made in purchase of bonds and payment of interest ($270,000 + $3,150)|
|#2||Cash||$9,450||Record inflow of cash for semiannual interest ($270,000 x 7% x (6 months / 12 months))|
|Interest Receivable||$3,150||Remove interest receivable recorded on bond's purchase date|
|Interest Revenue||$6,300||Record revenue earned on bond ($9,450 - $3,150)|
|#3||Cash||$185,850||Record inflow of cash from sale ($180,000 x 1.02 + $2,250)|
|Bonds Receivable||$180,000||Remove bonds at face value|
|Interest Revenue||$2,250||Record interest revenue earned|
|Gain on Sale of Bonds||$3,600||Record gain on sale ($185,850 - $180,000 - $2,250)|
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from Financial Accounting: Help and ReviewChapter 8 / Lesson 7