Q8E_1 - Horngren'S Financial And Managerial Accounting

Question

Accounting for debt investments

Griffin purchased a bond on January 1, 2018, for \(140,000. The bond has a face value of \)140,000 and matures in 20 years. The bond pays interest on June 30 and December 31 at a 3% annual rate. Griffin plans on holding the investment until maturity.

Requirements 

1. Journalize the 2018 transactions related to Griffin’s bond investment. Explanations are not required.

Step-by-Step Solution

Answer

Both sides of the journal totals $144,200.

Step 1: Definition of Maturity Date

A maturity date can be defined as the specific date on which the borrower is liable to repay the principal amount of the loan and any interest due. 

Step 2: Journal Entry for Transaction

Date	Accounts and Explanation	Debit $	Credit $
1 Jan 2018	Held to maturity – debt investment	$140,000
	Cash		$140,000
30 June 2018	Cash	$2,100
	Interest revenue		$2,100
31 Dec 2018	Cash	$2,100
	Interest revenue		$2,100
		$144,200	$144,200

 

Working note:

Calculation of Interest Revenue:

 

$$\begin{gathered} Interestrevenue=Facevalue\times Interestrate\times \frac{6}{12} \\ =\$140,000\times 3\%\times \frac{6}{12} \\ =\$2,100 \end{gathered}$$