Q2SE_1 - Horngren'S Financial And Managerial Accounting

Question

Accounting for debt investments

On January 1, 2018, the Chaucer’s Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December 31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer’s intends to hold the bonds until December 31, 2023.

Requirements 

1. Journalize the transactions related to Chaucer’s investment in Lake Turner bonds during 2018.

Step-by-Step Solution

Answer

Both sides of the Journal total $93,600.

Step 1: Definition of Bonds

Bonds can be defined as debt security issued with a specified maturity date and interest rate. Such securities require regular interest payment to their holders.

Step 2: Journal Entries Related to Chaucer’s Investment

Date	Accounts and Explanation	Debit $	Credit $
1 Jan 2018	Held to maturity – Debt Investment	$90,000
	Cash		$90,000
30 June 2018	Cash	$1,800
	Interest revenue		$1,800
31 Dec 2018	Cash	$1,800
	Interest revenue		$1,800
		$93,600	$93,600

 

Working note:

Calculation of Interest:

 $$\begin{gathered} Interestrevenue=Facevalue\times Interestrate\times \frac{6}{12} \\ =\$90,000\times 4\%\times \frac{6}{12} \\ =\$1,800 \end{gathered}$$