Question

On August 1, 2018, Fowler Company acquired $500,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2023, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2018?

Answer 1

Answer:

a. Debt Investments 520,000

Interest Revenue 12,500

Cash 532,500

Explanation:

The journal entry is as follows

Debt Investments 520,000

Interest Revenue 12,500

         To Cash 532,500

(Being the purchase of the bond is recorded)

The calculation is shown below:

For debt investment,

= $500,000 × 104%

= $520,000

And, for interest revenue it is

= $500,000 × 10% × 3 months ÷ 12 months

= $12,500

The three months is calculated from the May 1, 2018 to August 1, 2018

Since the bonds are purchased so the cash account are credited and the debt investment and the interest revenue is debited