Question

On December 31, 2018, Sandy Cheeks purchased $80,000, 7%, 20 year bonds as an LONG-TERM investment for $88,000 cash. The bonds pay interest semi-annually each June 30 and December 31. On December 31, 2019, the fair market value of the bonds is $83,000. Give the general journal entries required on December 31, 2018 and for the year 2019. Be sure to indicate the NAMES of the accounts to be debited and credited and the AMOUNTS of the debits and credits and make sure it is clear which accounts are being debated and which are being credited. POST your entries to T-accounts before answering the next question.

Answer 1

Date	Particulars	Debit	Credit
Dec 31, 2018	Investment in Bond Account	$88,000
	To Cash Account		$88,000

Investment In Bond "T" A/c

Date	Debit	Amount	Credit	Amount
Dec 31, 2018	To Cash	$88,000

Cash "T" A/c

Date	Debit	Amount	Credit	Amount
Dec 31, 2018			By Investment in Bond	$88,000

Since Sandy Cheeks has purchased bond on December 31, 2018 we assume there would be no interest receivable for 2018 year.

Date	Particulars	Debit	Credit
June 30, 2019	Cash Account (80,000*7%*1/2)	2,800
	To Interest Received		2,800
Dec 31, 2019	Cash Account (80,000*7%*1/2)	2,800
	To Interest Received		2,800
Dec 31, 2019	Impairment Loss Account (88,000-83,000)	5,000
	To Investment in Bond		5,000

Note we always calculate the interest rate on face value of bond i.e 80,000 and 7% is per annum since company pays half yearly we divide by 2. Since the carrying amount of investment is more than fair value we should recognize impairment loss.

Cash "T" A/c

Date	Debit	Amount	Credit	Amount
Jun 30,2019	To Interest Received	$2,800
Dec 31, 2019	To Interest Received	$2,800

Investment In Bond "T" A/c

Date	Debit	Amount	Credit	Amount
Jan 1, 2019	To Balance b/f	$88,000
Dec 31,2019			By Impairment Loss	$5,000
Dec 31,2019			By Balance c/f	$83,000