Question

1. On January 1, 2011, Navy Corporation used excess cash to purchase U.S. Treasury bonds for $100,000. The appropriate interest rate is 6%. Interest on these bonds is payable on January 1 and July 1 of each year. Navy's investment is accounted for as held to maturity. The fair value of the Treasury bonds is $104,000 at year end.

Required: Prepare the appropriate journal entries to record the transactions for the year, including any year-end adjustments. Show calculations, rounded to the nearest dollar.

Answer 1

Answer:

On March 1, 2011, Navy Corporation used excess cash to purchase U.S. Treasury bonds for $100,000 .

The appropriate interest rate is 6%.

It is assumed that face value of the U.S. Treasury bonds is $100,000.

So total purchase cost of U.S.treasury bonds will be for $100,000

Navy's investment is accounted for as held to maturity. So investment will be recorded at cost and the fair value of the Treasury bonds is $104,000 at year end is irrelevant.

Interest on these bonds is payable on January 1 and July 1 of each year.

6 monthly Interest = $100,000 * 6% * 6/12

= $ 3000

March 1, 2011

1. US T. bonds (Invest) A/c Dr. $104,000

  To Bank A/c Cr $ 104,000

July 1, 2011

1. Bank A/c Dr. $ 3,000

To Interest A/c Cr $ 3,000

31 December, 2011

1. Interest A/c Dr. $ 3,000

To Profit and loss A/c Cr $ 3,000