Question

On April 1, Alliance Company purchased $50,000 of Tetter Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, Alliance received its first semiannual interest. On February 1, Alliance sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Alliance will record on April 1 for the purchase of the bonds will include a:

Answer 1

Answer:

The journal entry will include

Investments in debt securities - Tetter Company bonds (Dr) $50,000

Explanation:

Since the bonds was purchased as investments for $50,000 they will be an asset for the Alliance company and hence will be debited as per the accounting principle of debiting all incoming assets.Investment is a real account and it will be debited with the face value of $50,000. The bond will be recorded in Alliance's books at face value i.e $50,000.

The journal entry made in the books of Alliance Company at the time of purchase would have been:

Investments in debt securities - Tetter Company bonds (Dr) $50,000

Answer 2

Answer:

Dr Investment in bonds - Tetter Company 50,000

Dr Interest receivable 2,000

    Cr Cash 52,000

Explanation:

At April 1, Alliance Company purchased $50,000 worth of bonds at face value (100) plus $2,000 accrued interest.

The company paid in total $52,000 for the transaction, and it should have recorded $50,000 as investment in bonds + $2,000 as interest receivable.