2TI - Horngren'S Financial And Managerial Accounting

Question

On January 1, 2018, the College Corporation decides to invest in Small Town bonds. The bonds mature on December 31, 2022, and pay interest of 4% on June 30 and December 31. The market rate of interest was 4% on January 1, 2018, so the $20,000 maturity-value bonds sold for face value. College Corporation intends to hold the bonds until maturity. Journalize the transactions related to College Corporation’s investment in Small Town bonds during 2018.

Step-by-Step Solution

Answer

Both sides of the journal total $20,800.

Definition of Interest Revenue

The benefits generated by interest fees charged on the amount given as a loan are known as interest revenue. It is calculated based on the specified percentage.

Journal Entries for Recording Investment

Date	Accounts and Explanation	Debit $	Credit $
1 Jan 2018	Held-to-maturity debt investment	$20,000
	Cash		$20,000
30 June 2018	Cash	$400
	Interest revenue		$400
31 Dec 2018	Cash	$400
	Interest revenue		$400
Total	$20,800	$20,800

 

Working note:

$\begin{array}{rcl}\mathrm{Interest} \mathrm{revenue}& =& \mathrm{Principal}\times \mathrm{Interest} \mathrm{rate}\times \frac{6}{12}\\ & =& \$20,000\times 4\%\times \frac{6}{12}\\ & =& \$400\end{array}$