On May 1, 2010, Stanton Company purchased $50,000 of Harris Company\'s 12% bonds

Question

On May 1, 2010, Stanton Company purchased $50,000 of Harris Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, 2010, Stanton received its first semiannual interest. On February 1, 2011, Stanton sold $40,000 of the bonds at 103 plus accrued interest.

The journal entry Stanton will record on Feb 1, 2011 will include:
1) a credit to Interest Revenue for $1,200
2) a credit to Gain on Sale of Investments for $1,200
3) a debit to Cash for $41,200
4) a credit to Interest Receivable for $500

Explanation / Answer

Gain = ($40,000 x 1.03) - $40,000 = $1,200 Answer: 2) a credit to Gain on Sale of Investments for $1,200

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