On May 1, 2014, Kirmer Corp. purchased $900,000 of 12% bonds—with interest payab
ID: 2459344 • Letter: O
Question
On May 1, 2014, Kirmer Corp. purchased $900,000 of 12% bonds—with interest payable on January 1 and July 1—for $843,900 plus accrued interest. The bonds mature on January 1, 2020. Amortization is recorded when interest is received by the straight-line method (by months and rounded to the nearest dollar). (Assume bonds are available for sale.)
Instructions: (a) Prepare the entry for May 1, 2014.
(b) The bonds are sold on August 1, 2015 for $847,500 plus accrued interest. Prepare all entries required to properly record the sale.
Explanation / Answer
Answer:
Journal entries in the books of Kirmer Corp
Book value of 12% bond avilable for sale investment A/c as on 01 August, 2015 =
(A) Cost = 843,900
(B) Add : Ammortized discount recorded for the period of
May 2014 to July 2015 @ 825 per month (825 x 15 month) = 12,375
Total book value (A+B) = 856,275
Date Particular Debit $ Credit $ 1 May, 2014 12% bond avilable for sale investment A/c 807,900 Interest income A/c (4 month accrued interest up to May 2014) 36,000 To Cash/Bank A/c 843,900 (12% bond purchased with accrued interest income from January -2014 to April 2014) B 12% bond avilable for sale investment A/c 825 To interest revenue A/c 825 (Amount of discount 900,000- 843,900 =56,100 ammortized in remaining period of 68 month and amount credited to interest revenue accout) 56,100/68 = 825, this entry will be recorded every month upto the date of sale) July 2014 & January 2015, July 2015 Cash A/c 9000 To Interest revenue A/c 9000 (half yearly interest recorded) August 1, 2015 Cash A/c 847,500 Loss on sale of avialable for sale security A/c 8775 To 12% Bond avilable for sale investment A/c 856,275 (12% bond available for sale sold) refer note 1 belowRelated Questions
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