Question

Purchase and Sale of Bonds

Starship Enterprises enters into the following transactions during 2017 and 2018:

Required:

1. Identify and analyze all transactions on Starship’s records to account for its investment in the Northern Lights bonds.

2017 Jan. 1: Purchased $100,000 face value of Northern Lights Inc. bonds at face value. The newly issued bonds have an interest rate of 8% paid semiannually on June 30 and December 31. The bonds mature in five years.

Activity	Investing
Accounts	Investments in Northern Lights Bonds Increase, Cash Decrease
Statement(s)	Balance Sheet only

Feedback

1) Determine activity.
1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock.
1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities.
1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business.
2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases.
3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity.
Income Statement accounts: Revenues – Expenses = Net Income.
(Equations must stay in balance)
January 1, 2017: 4) Record purchase of bonds to Investment in Northern Lights Bonds and payment of Cash.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Bad Debts Expense

Bonds Payable

Bonds Payable

Bad Debts Expense

Cash

Bad Debts Expense

Cash

Bonds Payable

Feedback

Partially correct

2017 June 30: Received interest on the Northern Lights Inc. bonds.

Activity	Operating
Accounts	Cash Increase, Interest Revenue Increase
Statement(s)	Balance Sheet and Income Statement

Feedback

1) Determine activity.
1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock.
1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities.
1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business.
2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases.
3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity.
Income Statement accounts: Revenues – Expenses = Net Income.
(Equations must stay in balance)
June 30, 2017: 4) Interest payment = principle x rate x time. Record bond interest earned and received to Interest Revenue and payment received to Cash.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Cash

Cash

Cash

Cash

Feedback

Partially correct

2017 Dec. 31: Received interest on the Northern Lights Inc. bonds.

Activity
Accounts
Statement(s)

Feedback

1) Determine activity.
1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock.
1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities.
1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business.
2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases.
3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity.
Income Statement accounts: Revenues – Expenses = Net Income.
(Equations must stay in balance)
December 31, 2017: 4) Interest payment = principle x rate x time. Record bond interest earned and received to Interest Revenue and payment received to Cash.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Cash

Cash

Interest Expense

Bonds Expense

Feedback

Partially correct

2018 Jan. 1: Sold the Northern Lights Inc. bonds for $102,000.

Activity
Accounts
Statement(s)

Feedback

1) Determine activity.
1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock.
1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities.
1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business.
2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases.
3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity.
Income Statement accounts: Revenues – Expenses = Net Income.
(Equations must stay in balance)
January 1, 2018: 4) Record sale of bonds to Investment in Northern Lights Bonds and receipt of cash.
5) Record the difference between original purchase amount and sale for gain/loss on sale of stock. Losses reduce income and retained earnings. Gains increase income and retained earnings.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Feedback

Incorrect

2. Starship was able to sell its Northern Lights bonds for $102,000 which is more than the bonds will pay because:

1. the bonds carry a lower periodic interest than the market rate of interest that was in effect at the time of the sale
2. the bonds carry a higher periodic interest than the market rate of interest that was in effect at the time of the sale
3. the bonds were sold at face value in 2017
4. none of the above

Answer 1

1.2017 Jan. 1: Purchased $100,000 face value of Northern Lights Inc. bonds at face value

It is an Investing activity (Considering the main business of Star ship Entrp. is not purchasing and selling of bonds.).Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities.

Since there is a purchase made, there is an outflow of cash/ decrease in bank balance.So we credit cash/bank balance.And also simultaneously we got an Asset in the form of bonds in Northern lights Inc. hence we debit Investment in Northern Lights Inc.

The journal entry for the first transaction would be

Investment in Northern Lights Inc a/c Dr 100,000

To Cash a/c 100,000   

In this case the equation is balancesheet equation isnt effected as theri has been an increase and decrease in the Assets side of the Balance sheet. But the figure in the cash/bank gets decreased and an asset Investment in Northern Lights Inc is increased.Income statement is not affected.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Bad Debts Expense

00

Bonds Payable

00

Bonds Payable

Bad Debts Expense

Cash

-100000

Bad Debts Expense

Cash

Bonds Payable

Investment in Northen Lights

+100000

2017 June 30: Received interest on the Northern Lights Inc. bonds.

Receipt of interest semi annually is recorded in the Income Statement on Credit side i.e., under Revenues, as Interest Income.. Interest from Jan 1-June 30 amounting to 4000$ (100000*8%*6months/12) is shown in come statement.Its comes under Operating activity. Balance sheet and Income statement are affected.

Increase in Revenues will affect the entity's profit.and profit is reflected in the capital account and hence the capital account also affected(increases by 4000$ in this case) And on the assets side the Bank/Cash balances also increases an receipt of interest(4000$ in this case).Hence the Balance sheet equation is tallied.

Assets +4000$= liabilities + Stockholder equity +4000$

Journal Entry for receipt of interest:

Cash a/c Dr 4000

To Interest on Investments 4000

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Cash

+4000

Cash

+4000

Interest on investments

+4000

Cash

0

+4000

The same applies to the receipt of interest on 31 Dec 2017 interest amount (01 July- Dec 31) 100000*8%*6months/12=4000

01 Jan 2018:

Sale of Bonds for $102,000

Journal Entry for this transaction would be

Cash a/c   Dr    102,000

To Investment in Northern Lights Inc 100,000

To Profit on sale of Investments 2,000

And yes it is an Investing Activity. Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities.and that includes sale transactions as well.

In this case both the balance sheet and the income statement are affected

On the Balance sheet side.there is decrease of an asset amounting to 100,000 purchased earlier and increase of cash/bank balance of 102,000 which is amount realized on sale of investments.hence there is a net increase of 2000(102,000-100,000) on the assets side

On the other side of the balance sheet there is an increase of 2000 on shareholders equity side being the profit made on sale of investements. Profit made on such sale is recorded on the Revenues side of the income statement.Addition on the Revenues side affects the profit and such profit is reflected in the shareholders equity. The equation is tallied.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

investments in northern lights

-100,000

Profit on sale of investments

+2000

profit on sale

+2000

00

+2000

cash

+102,000

2. The  Starship was able to sell its Northern Lights bonds for $102,000 which is more than the bonds will pay because (b) the bonds carry a higher periodic interest than the market rate of interest that was in effect at the time of the sale.i.e 8%p.a = 100000*8% = 8000