Question

Metro Company purchased $100,000, 10%, 5-year bonds on January 1, 20x1, with interest payable on July 1 and January   The bonds sold for $108,111, which results in an effective interest rate of 8%.  The market value on December 31, 20x1 was $105,000 and all bonds were sold for $107,500 on January 1, 20x2 before the scheduled payment is made.

Required: prepare journal entries on January 1, 20x1, July 1, 20x1, December 31, 20x1 and January 1, 20x2 assuming the bond investment is classified as available-for-sale security.

Answer 1

Answer :-

Available-for-Sale Security :
1/1/X1	Available-for-Sale Bonds	$108,111
	Cash		$108,111
7/1/x1	Cash(100,000*10%*1/2)	5,000
	Interest revenue(100,000*10%*1/2)		5,000
12/31/X1	Interest receivable	5,000
	Unrealised Loss	3,111
	Available-for-Sale Bonds(108,111-105,000)		3,111
	Interest revenue(100,000*10%*1/2)		5,000
1/1/X2	Cash	112,500
	Loss on sale of bonds	611
	Available-for-Sale Bonds		105,000
	Interest receivable		5,000
	Unrealised Loss		3,111