Question

Entries for Investments in Bonds, Interest, and Sale of Bonds Torres Investments acquired $160,000 of Murphy Corp., 5% bonds at their face amount on October 1, Year 1. The bonds pay interest on October 1 and April 1. On April 1, Year 2, Torres sold $60,000 of Murphy Corp bonds at 102. Journalize the entries to record the following: Do not round interim calculations. Round final answers to nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank. a. The initial acquisition of the Murphy Corp. bonds on October 1, Year 1. Year 1, Oct. 1 b. The adjusting entry for three months of accrued interest earned on the Murphy Corp. bonds on December 31, Year 1. Year 1, Dec. 31 c. The receipt of semiannual interest on April 1, Year 2. Year 2, Apr. 1 d. The sale of $60,000 of Murphy Corp. bonds on April 1, Year 2, at 102. Year 2, Apr. 1

Answer 1

Entries for investment in bonds, interest and sale of bonds:

a) Initial acqusition of Murphy corp. Bonds

Date	General Journal	Debit	Credit
Year 1, Oct 1	Investment in Murphy corp bonds	$160000
	Cash		$160000

- Investment account has been debited since there is an increase in assets

- Cash has been credited since there is outflow of cash.

b) Adjustment entry for 3 months of accrued interest on bonds:

Date	General Journal	Debit	Credit
Year 1, Dec 31	Interest receivable	$2000
	Interest Revenue		$2000

- Interest recievable account has been debited since there is an increase in current assets

- Interest has been accrued on bonds and the amount of accrued revenue should be credited as per nominal account principle, Credit - income & gains.

- Interest accrued (Oct 1 to Dec 31)

= Face value of bonds × interest rate × Accrued period

= $160000 × 5% × (3/12)

= $8000 × (3/12)

= $2000

c) Reciept of semiannual interest on April

Date	General Journal	Debit	Credit
Year 2, April 1	Cash	$4000
	Interest recievable		$2000
	Interest Revenue		$2000

- Interest accrued for year 2 , from jan 1 to April 1

= Face value of bonds × interest rate × Accrued period

= $160000 × 5% × (3/12)

= $8000 × (3/12)

= $2000

- Total cash recieved

= interest recievable for year 1 + interest accrued for year

= $2000 + $2000

= $4000

- Cash account has been debited since there is an inflow of cash

- interest recievable has been credited since the payment of interest has been recieved from recievable and there is an decrease in current assets balance.

- Interesr Revenue has been credited since the part of the reciept is for the interest accrued in current year. Revenues and gains should be credited as per nominal account.

a) Initial acqusition of Murphy corp. Bonds

Date	General Journal	Debit	Credit
Year 1, Oct 1	Cash (600 bonds × 102)	$61200
	Gain on sale of bonds (600 bonds × 2)		$1200
	Investments in Morphy corp. Bonds (600 bonds × 100)		$60000

- Cash has been debited since there is an inflow of cash

- Investment account has been credited since there is an decrease in assets due to sale of investment in bonds

- Gain on sale of bonds has been credited since all revenues and gain should be credited as per nominal account

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