Question

On January ​1, 2018​, the Cook​'s Restaurant decides to invest in Lake Topsey bonds. The bonds mature on December​ 31, 2021​, 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 $ 140,000 maturity value bonds sold for face value. Cook​'s intends to hold the bonds until December​ 31, 2021.
Journalize the the transaction related to Cook's investment in lake Topsey bond during 2021.

Answer 1

Answer and Explanation:

The Journal Entry is shown below:-

Investment in bonds is at face value, no question about discount or premium.

Investment is rendered from the time the bonds mature before 2023. Hence, it is an investment as Working for Profit "Held until maturity"

Jan 1, 2018

Bonds receivables  Dr, $140,000

      To Cash  $140,000

(Being Investment in bonds is recorded)

30 June 2018

Cash Dr, $2,400

       To interest income $2,400

(Being six months interest received is recorded)

31 Dec 2018

3. Cash Dr, $2,400

       To interest income $2,400

(Being six months interest received is recorded)

Working note:-

Bond Value                         $140,000

Interest rate                          4%  

Interest earned half

yearly, effective rate

(4% × 6 ÷ 12)                            2%

Half Yearly interest amount

($140,000 × 2%)                     $2,800