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.

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Explanation / Answer

Debit Credit $ 1st May 2014 Investment in 12% Bonds         843,900 Accured Interest Account           36,000 To Bank Account        879,900 Accured Interest Calculation = $ 900000X 12%X4/12 = $ 36000 1st August 2015 Bank Account         574,000 To Investment in 12% Bond        565,000 To Interest income             9,000 Accured Interest Calculation = $ 900000X 12%X1/12 = $ 9000 1st August 2015 Loss on Sale of Investment         278,900 To Investment in 12% bond        278,900 (loss on sale of Investment $ 843900-$565000= $ 278900)

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