Investment in debt securities at a discount. On May 1, 2014, Kirmer Corporation

Question

Investment in debt securities at a discount.

On May 1, 2014, Kirmer Corporation purchased $900,000 of 12% bonds, 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 round 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 $565,000 plus accrued interest. Prepare all entries required to properly record the sale.

Please help, will give thumbs up thanks!!

Explanation / Answer

(a)Debit Debt Investments 843,900

Debit Interest Revenue ($900,000 × .12 × 4/12) 36,000

Credit Cash 879,900

(b)

Debit Debt Investments ($56,100 ÷ 68 × 1) 825

Credit Interest Revenue 825

Debit Cash ($900,000 × .12 × 1/12) 9,000

Credit Interest Revenue 9,000

Debit Cash 847,500

Debit Loss on Sale of Investments 8,775

Credit Debt Investments 856,275$843,900 + [($56,100 ÷ 68)×15]

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