Q18PGA_1 - Horngren'S Financial And Managerial Accounting

Question

Accounting for debt investments 

Suppose Solomon Brothers purchases $500,000 of 6% annual bonds of Morin 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. Solomon intends to hold the Morin bond investment until maturity. 

Requirements 

1. Journalize Solomon Brothers’ transactions related to the bonds for 2018.

Step-by-Step Solution

Answer

Both sides of the journal total $530,000.

Definition of Bonds Payable

An account reflecting the financial liability against the money borrowed through the issue of debt securities is known as a bond payable. 

Journal Entries for Transaction in 2018

Date	Accounts and Explanation	Debit $	Credit $
1 Jan 2018	Held to maturity – debt investment	$500,000
	Cash		$500,000
30 June 2018	Cash	$15,000
	Interest revenue		$15,000
31 Dec 2018	Cash	$15,000
	Interest revenue		$15,000
		$530,000	$530,000

 

Calculation of Interest revenue:

$$\begin{gathered} \text{Interest Revenue=Principal×Interest rate}\times \frac{6}{12} \\ =500,000\times 6\%\times \frac{6}{12} \\ =\$15,000 \end{gathered}$$