Homework Answers
Recording of the transactions and adjustments of the Gressens Company using Journal entries.
| Date | Description | Debit ($) | Credit ($) | |
| 10/1/2016 |
|
486,000 | ||
| Cash | 486,000 | |||
| To record purchase of Debt Securities | ||||
| 12/31/2016 |
|
8,750 | ||
|
8,750 | |||
| To record interest earned on debt securities | ||||
| 12/31/2016 |
|
4,000 | ||
|
4,000 | |||
| To adjust securities to year-end fair value | ||||
| 3/31/2017 | Cash | 17,500 | ||
|
8,750 | |||
|
8,750 | |||
| To record receipt of Interest on bond securities | ||||
| 4/1/2017 | Cash | 492,300 | ||
|
2,300 | |||
|
490,000 | |||
| To record sale of debt securities |
Working Notes
(1) Calculation of amount of bond investment
It is assumed that Face value of Bond for $ 500,000 is at 100
Then at 97 Purchase value will be 97% of $ 500,000
= 485,000
Commission = $ 1,000
Total purchase cost of debt securities = $485,000+$1,000= $486,000
(2) Calculation of Quarterly Interest on debt securities
Interest rate = 7%
Interest amount = 500,000 X 7%
= 35,000 yearly
Then Quarterly Interest amount = 35,000 / 4
= 8,750
(3) Calculation of gain or (loss) on sale of debt securities
= sale value of bond investment - Carrying value of bond investment
= 492,300 - (486,000 + Fairvalue gain amount $ 4,000)
= 492,300 - 490,000
= $ 2,300
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