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:____________.
1. debit for Cash of $50,000
2. debit to Investments—Tetter Company Bonds for $52,000
3. debit to Investments—Tetter Company Bonds for $50,000

Answer 1

Answer:

Option (3) is correct.

Explanation:

Given that,

cost of purchasing Tetter Company's 12% bonds = $50,000

Accrued interest expense = $2,000

The journal entry is as follows:

On April 1,

Investments in debt securities - Tetter Company bonds A/c Dr. $50,000

Interest receivable A/c Dr. $2,000

                   To Cash    $52,000

(To record the purchase of the bonds)