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The following are selected bond investment transactions for Madison Inc. -Purchased for cash...

Question:

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:

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:

Entry # Account Debit Credit 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)

Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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