Question

Kendall Corp. purchased at par value $160,000 of Barker Company's 7% bonds that mature in 10 months. The bonds pay interest semiannually on June 1 and December 1. Kendall plans to hold the bonds until they mature. The journal entry to record Kendall's purchase of the bonds is:a. debit Short-Term Investments—HTM $160,000; credit Cash, $160,000.
b. debit Cash, $169,333; credit, Short-Term Investments—HTM $169,333.
c. debit Cash, $160,000; credit Short-Term Investments—HTM $160,000.
d. debit Long-Term Investments-HTM $160,000; credit Cash $160,000.
e. debit Cash, $160,000; credit Long-Term Investments-HTM $160,000.

Answer 1

Answer:

The correct answer is a. Debit Short-Term Investment for $160,000 and Credit Cash for the Same Amount.

Explanation:

Investments in Money Market Instruments, that is those instruments that mature within one year, are classified as Short-term Investments. Whereas, investments for a period of more than one year are termed as Long-term Investments. Since Kenall Corp. purchased bonds that will mature within one year, so such investment shall be classified under the head of Current Assets.

In-case of interest received semi-annually, Cash will be debited and Finance Income will be credited.

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Answer 2

Answer:

A) debit Short-Term Investments—HTM $160,000; credit Cash, $160,000.

Explanation:

Since Kendall purchased the bonds to hold them until maturity, it must consider them short term investments - hold to maturity. When a company purchases and resells bonds as part of their normal operations they are reported as trading securities in the balance sheet.

Bonds are not considered money market instruments, they are investment instruments (long-term or short-term) or trading securities.