Question

Glover Corporation purchased bonds with a face value of $300,000 for $307,493.34 on January 1, 2018. The bonds carry a face rate of interest of 12%, pay interest semiannually on June 30 and December 31, were purchased to be held to maturity, are due December 31, 2020, and were purchased to yield 11%. On January 1, 2019, in contemplation of a major acquisition, the bonds were sold for $300,000. Glover uses the effective interest method.

Required:

1.	Prepare journal entries to record the purchase of the bonds, the first two interest receipts, and the sale of the bonds.
2.	Next Level Which of the following is an acceptable reason for a company to sell a held-to-maturity debt security prior to its maturity?

CHART OF ACCOUNTS
Glover Corporation
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 181 Equipment 189 Accumulated Depreciation 191 Investment in Held-to-Maturity Debt Securities LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue 431 Interest Income 434 Gain on Sale of Debt Securities EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 599 Loss on Sale of Debt Securities 910 Income Tax Expense

Prepare journal entries to record the purchase of the bonds on January 1, 2018 and the first two interest receipts on June 30 and December 31, 2018. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8

Prepare journal entry to record the sale of the bonds on January 1, 2019. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3

Which of the following is an acceptable reason for a company to sell a held-to-maturity debt security prior to its maturity?

an isolated, nonrecurring or unusual event

the need for cash

a change in market rates

Answer 1

Answer 1

Journal Ent Answer 1 (al Prepare the journal entries to record the purchase of the bonds. Date General Journal Debit Credit Investment in Bonds Premium on Bonds Cash (The bonds will be reported on balance sheet at face value plus premium on bonds) 1-Jan-18 300,000 7,493 307,493 Answer 1b Prepare the journal entries to record the first two interest receipts. Date General Journal Debit Credit Cash Premium on Bonds Interest Revenue (Interest income is recognized) 30-Jun-18 18,000 1,088 16,912 Date General Journal Debit Credit Cash Premium on Bonds Interest Revenue 31-Dec-18 18,000 1,148 16,852 Answer1c Prepare journal entries to record the sale of the bonds. Date General Journal Debit Credit Cash Loss on sale of Bonds Premium on Bonds Investment in Bonds entry to record the sale of the bonds 1-Jan-19 300,000 5,258 5,258 300,000

Answer 2

When investors purchase debt securities such as bonds, they have two choices: to hold the security until maturity or to sell it at a premium following a relative decline in interest rates. A debt security is described as held-to-maturity if the holder chooses to hold it for the entirety of its term. An acceptable reason for a company to sell a held-to-maturity debt security prior to its maturity could be the need for cash