On January 1, Franco Company purchased as an investment a $1,000, 12% bond for $1,050. The bond pays interest on January...
On January 1, Franco Company purchased as an investment a $1,000, 12% bond for $1,050. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31?
a. Interest Receivable ................................................................ 120
Interest Revenue .......................................................... 120
b. Debt Investments .................................................................. 120
Interest Revenue .......................................................... 120
c. Interest Receivable ................................................................ 123
Interest Revenue .......................................................... 123
d. Debt Investments .................................................................. 123
Interest Revenue .......................................................... 123
Homework Answers
The answer is option a. Reason:
When interest income is accrued, the nterest receivable is debited as it is an asset. The corresponding credit is done to interest income (or revenue) account.
Here, the bonds are purchased for $1,050 but the face value of these bonds is $1,000. So, the interest shall be calculated on the face value of the bonds.
Interest = $1,000 × 12% = $120.
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