Question

Entries for Investment in Bonds, Interest, and Sale of Bonds

The following bond investment transactions were completed during a recent year by Starks Company:

Year 1
Jan. 31	Purchased 45, $1,000 government bonds at 100 plus accrued interest of $225 (one month). The bonds pay 6% annual interest on July 1 and January 1.
July 1	Received semiannual interest on bond investment.
Aug. 30	Sold 18, $1,000 bonds at 97 plus $180 accrued interest (two months).

a. Journalize the entries for these transactions.

Assume a 360-day year. Do not round interim calculations. Round final answers to nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.

Year 1, Jan. 31	Investments-Government Bonds
	Interest Receivable
	Cash
Year 1, July 1	Cash
	Interest Receivable
	Interest Revenue
Year 1, Aug. 30	Cash
	Loss on Sale of Investments
	Interest Revenue
	Investments-Government Bonds

Feedback

a. Record the investment at face value. Interest that is receivable on the date of purchase must be recorded as well.

Record the interest revenue as earned. Bond principal x interest rate x time = Total interest. Remember to consider any receivable on the books.

Calculate the proceeds: First compute the % x face amount of bonds sold. Next, adjust the amount for any accrued interest. To complete the entry, determine any gain or loss on the transaction.

b. Provide the December 31, Year 1, adjusting journal entry for semiannual interest earned on the bonds.

Assume a 360-day year. Do not round interim calculations. Round final answers to nearest dollar.

Year 1, Dec. 31	Interest Receivable
	Interest Revenue

Answer 1

a. Journalize the entries for these transactions.

Assume a 360-day year. Do not round interim calculations. Round final answers to nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.

Year 1, Jan. 31	Investments-Government Bonds	45000
	Interest Receivable	225
	Cash		45225
Year 1, July 1	Cash	1350
	Interest Receivable		225
	Interest Revenue (45000*6%*5/12)		1125
Year 1, Aug. 30	Cash (18000*.97/100)	17460
	Loss on Sale of Investments	720
	Interest Revenue		180
	Investments-Government Bonds		18000

b) Journal entry

Assume a 360-day year. Do not round interim calculations. Round final answers to nearest dollar.

Year 1, Dec. 31	Interest Receivable (27000*6%*6/12)	810
	Interest Revenue		810