On May 1, 2018, Kirmer Corp. purchased $1,500,000 of 12% bonds—with interest pay
ID: 2530966 • Letter: O
Question
On May 1, 2018, Kirmer Corp. purchased $1,500,000 of 12% bonds—with interest payable on January 1 and July 1—for $1,406,500 plus accrued interest. The bonds mature on January 1, 2024. 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, 2018.
(b) The bonds are sold on August 1, 2019 for $1,412,500 plus accrued interest. Prepare all entries required to properly record the sale.
Explanation / Answer
Kirmer Corp
Date
Account Titles and Explanation
Debit
Credit
1-May-18
Available-for-Sale Securities
$1,406,500
Interest Revenue
$60,000
Cash
$1,466,500
(To record purchase of 12% bonds)
Available-for-Sale Securities
$1,375
Interest Revenue
$1,375
(To record inerest expense)
Cash
$15,000
Interest Revenue
$15,000
(To record interest expense on date of sale - August 1, 2018)
)
Cash
$1,412,500
Available for sale- securities
$1,406,500
Gain on sale of securities
$6,000
Amortization = $1,500,000 - $1,406,500 = $93,500
The bond period is for 5 years 8 months = 68 months
Hence monthly interest revenue = $93.500/68 = $$1,375
Interest revenue = 1,500,000 x12% x 1/12 = &18.000
Date
Account Titles and Explanation
Debit
Credit
1-May-18
Available-for-Sale Securities
$1,406,500
Interest Revenue
$60,000
Cash
$1,466,500
(To record purchase of 12% bonds)
Available-for-Sale Securities
$1,375
Interest Revenue
$1,375
(To record inerest expense)
Cash
$15,000
Interest Revenue
$15,000
(To record interest expense on date of sale - August 1, 2018)
)
Cash
$1,412,500
Available for sale- securities
$1,406,500
Gain on sale of securities
$6,000
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