On May 1, 2010, Kirmer Corp. purchased $450,000 of 12% bonds, interest payable o

Question

On May 1, 2010, Kirmer Corp. purchased $450,000 of 12% bonds, interest payable on January 1 and July 1, for $422,800 plus accrued interest.
The bonds mature on January 1, 2016. Amortization is recorded when interest is received by the straight-line method (by months and round to the
nearest dollar). (Assume bonds are available for sale.)
Instructions
(a) Prepare the entry for May 1, 2010.
(b) The bonds are sold on August 1, 2011 for $425,000 plus accrued interest. Prepare all entries required to properly record the sale.

Explanation / Answer

(a). Journal entry for may 1: Date Particulars L/F Dr $ Cr $ 1-May Investments-Kirmer Corp 422,800 Interest receivable 27,200              Cash 450,000 (purchased $450,000 bonds) Date Particulars L/F Dr $ Cr $ 1-May Investments-Kirmer Corp 422,800 Interest receivable 27,200              Cash 450,000 (purchased $450,000 bonds) (b). Date Particulars L/F Dr $ Cr $ 1-Aug Cash 425,000              Gain on sale of investments 2,200             Investments-Kirmer corp bonds 422,800 (sale of bonds) Interest receivable 10,570              Interest revenue 10,570 (422,800 x 12% x 1.25/6) (Accrued interest) Date Particulars L/F Dr $ Cr $ 1-May Investments-Kirmer Corp 422,800 Interest receivable 27,200              Cash 450,000 (purchased $450,000 bonds)

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