10-10E_2 - Horngren'S Financial And Managerial Accounting

Question

 Accounting for debt investments

League Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $900,000 of CocoCorp bonds at face value on January 2, 2018. The CocoCorp bonds pay interest at the annual rate of 8% on June 30 and December 31 and mature on December 31, 2022. League Up intends to hold the investment until maturity.

Requirements 

2. Journalize the following on League Up’s books: 

a. Receipt of final interest payment on December 31, 2022. 

b. Disposition of the investment at maturity on December 31, 2022

Step-by-Step Solution

Answer

Interest revenue for a period of 6 months is equal to $36,000.

Definition of Corporate Bonds

The security issued by the business units to the investors for generating cash to fulfil capital requirements is known as a corporate bond. It is a type of debt security that requires regular interest payment.

Journal Entry for Final Interest Receipt

Date	Accounts and Explanation	Debit $	Credit $
31 Dec 2022	Cash	$36,000
	Interest revenue		$36,000

 

Working note:

Calculation of Interest revenue:

$$\begin{gathered} Interest revenue=Face value\times Interest rate\times \frac{6}{12} \\ =\$900,000\times 8\%\times \frac{6}{12} \\ =\$36,000 \end{gathered}$$

Journal Entry for Disposition of Investment at Maturity

Date	Accounts and Explanation	Debit $	Credit $
31 Dec 2022	Cash	$900,000
	Held to maturity – debt investment		$900,000