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My question is on b only. I understand (or think I do) that at the purchase of a

ID: 2468975 • Letter: M

Question

My question is on b only.

I understand (or think I do) that at the purchase of a bond the purchaser must pay the accrued interest, but will get that amount back when they receive the first interest payment. My question is, why is that amount subtracted from the first interest payment instead of added, if they are getting it back?

Meaning, why would the entry be;

Cash                                   3,000

     Interest Receivable                      1,000

      Interest Revenue                          2,000

Instead of;

Cash                                   4,000

     Interest Receivable                      1,000

      Interest Revenue                          3,000 (120,000 x 5% x 1/2)

Journalize the entries to record the following selected bond investment transactions for Starks Products:

a. Purchased for cash $120,000 of Iceline, Inc. 5% bonds at 100 plus accrued interest of $1,000a. .

b. Received first semiannual interest payment.

c. Sold $60,000 of the bonds at 101 plus accrued interest of $500

.

Explanation / Answer

entry will be:

cash Dr. $3000

To interest revenue $2000

To Accounts payable $1000

As interest earned for the time before the purchase of investment is not our revenue. So It wont be recorded as revenue