Question

On November 1, 2015, Reid Corporation acquired bonds with a face value of $700,000 for $673,618.61. The bonds carry a stated rate of interest of 10%, were purchased to yield 11%, pay interest semiannually on April 30 and October 31, were purchased to be held to maturity, and are due October 31, 2020. On November 1, 2016, in contemplation of a major acquisition, the bonds were sold for $700,000. Reid is on a fiscal year accounting period ending October 31 and uses the effective interest method.

Required:

Prepare journal entries to record the purchase of the bonds, the interest receipts on April 30, 2016, and October 31, 2016, and the sale of the bonds.

Answer 1

Date	Account	Debit	Credit
Nov 1, 2015	Investment in bonds	6,73,618.61
	Cash		6,73,618.61
	[Entry to record purchase of the bonds]
April 30, 2016	Cash	35,000.00
	Interest revenue		37,049.02
	Investment in bonds	2,049.02
	[Entry to record interest payment]
Oct 31, 2016	Cash	35,000.00
	Interest revenue		37,161.72
	Investment in bonds	2,161.72
	[Entry to record interest payment]
Nov 1, 2016	Cash	7,00,000.00
	Investment in bonds		6,77,829.35
	Gain on sale of bonds		22,170.65
	[Entry to record sale of bonds]

Interest and carrying value workings:

Date	Beginning investment value	Cash interest	Interest revenue	Increase in investment value	Ending investment value
	A	B= 700,000 X 10%X 6/12	C= A X 11% X 6/12	D = C-B	E= A+D
Oct-15					6,73,618.61
Apr-16	6,73,618.61	35,000.00	37,049.02	2,049.02	6,75,667.63
Oct-16	6,75,667.63	35,000.00	37,161.72	2,161.72	6,77,829.35