Question

Entries for Investment in Bonds, Interest, and Sale of Bonds

The following bond investment transactions were completed during a recent year by Starks Company:

Year 1
Jan. 31	Purchased 45, $1,000 government bonds at 100 plus accrued interest of $225 (one month). The bonds pay 6% annual interest on July 1 and January 1.
July 1	Received semiannual interest on bond investment.
Aug. 30	Sold 18, $1,000 bonds at 97 plus $180 accrued interest (two months).

a. Journalize the entries for these transactions.

Assume a 360-day year. 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.

Year 1, Jan. 31
Year 1, July 1
Year 1, Aug. 30

b. Provide the December 31, Year 1, adjusting journal entry for semiannual interest earned on the bonds.

Assume a 360-day year. Do not round interim calculations. Round final answers to nearest dollar.

Year 1, Dec. 31

Answer 1

Answer:

Bonds purchased at 100 means they are purchased at par, below are the journal entries along with workings:

Date	Particulars	Debit	Credit
31-Jan	Investment in Bonds	45000
	Interest income	225
	Cash account		45,225
	(To record purchase of 75 $1,000 bonds at 100 plus 30 days accrued interest)
	Bonds amount = 45*1000 = 45,000
	Interest amount = (45,000*6%)/12 = 225
1-Jul	Cash account	1350
	Interest income		1350
	(To record semi annual interest received)
	Interest amount = (45,000*6%)/2 = 1350
29-Aug	Cash account	17640
	Loss on sale of bonds	640
	Interest income		180
	Investment in Bonds		18000
	(To record sale of 35 $1,000 bonds @98 plus interest earned $350)
	Sale amount = 18*1000*97% = 17,460
	Cash received = 17,460+180= 17,640
	Bonds Original amount = 18*1000=18000
	Loss on sale of bonds = 18000-17640= 640
31-Dec	Interest receivable account	810
	Interest income		810
	(To record semi annual interest earned on remaining 27 bonds)
	Interest = (27*1000*6%)/2 = 810