Q.10-21PGB_1 - Horngren'S Financial And Managerial Accounting

Question

Question: P10-21B Accounting for debt investments

Suppose Hale and Sons purchases $800,000 of 3.5% annual bonds of Tyson Way Corporation at face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2022. Hale and Sons intends to hold the Tyson Way bond investment until maturity. 

Requirements 

1. Journalize Hale and Sons’s transactions related to the bonds for 2018. 

Step-by-Step Solution

Answer

Answer

Both sides of the journal totals $828,000.

Step 1: Definition of Principal Amount

The actual amount of money transferred to the borrower by the lender is known as the principal amount. The interest is charged on this amount only.

 

Step 2: Journal Entries for the Transaction

Date	Accounts and Explanation	Debit $	Credit $
Jan 1, 2018	Held to maturity – debt investment	$800,000
	Cash		$800,000
June 30, 2018	Cash	$14,000
	Interest revenue		$14,000
Dec 31, a2018	Cash	$14,000
	Interest revenue		$14,000
		$828,000	$828,000

Calculation of Interest revenue:

 

$$\begin{gathered} \text{interest revenue =principal ×interest rate×}\frac{6}{12} \\ \text{ =\$800,000×3.5\%}\frac{6}{12} \\ \text{ =\$14,000} \end{gathered}$$