Question

Purchases, discount amortization, and sales of bond investments On November 1, 2017, 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, 2021. On November 1, 2018, 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, 2018, and October 31, 2018, and the sale of the bonds.

Answer 1

Date	Accounts	Debit	Credit
Nov 1 2017	Bonds receivable	700000
	Cash		673618.61
	Discount on bonds receivable		26381.39
April 3 2018	cash (700000*10%*6)12)	35000
	Discount on bonds receivable	2049.02
	Interest revenue (673618.61*11%*6/12)		37059.02
Oct 31, 2018	cash	35000
	Discount on bonds receivable	2049.02
	Interest revenue		37059.02
Nov 1, 2018	Cash	700000
	Discount on bonds receivable (26381.39-2049.02-2049.02)	22283.25
	Notes receivable		700000
	Profit on sale bonds receivable		22283.25