Insuarance companies and pension plans hold large quantities of bond incestments
ID: 2731756 • Letter: I
Question
Insuarance companies and pension plans hold large quantities of bond incestments. Housemann Insurance Corp. purchased $2,600.000 of 10,0% bonds of Sardoan, Inc., for 114 on January 1, 2014. These bonds pay interest on January 1 and July 1 each year. They mature on January 1, 2018. At October 31, 2014, the end of the fiscal year, the market price of the bonds is 105.
Requirements:
1, Journalize Housemann's purchase of the bonds as a long-term investment on January 1, 2014 (to be held to maturity), reciept of cash interest, and amortization of the bond premium at July 1, 2014. The straight-line method is appropriate for amortizing the bond investment.
2, Journalize the accrual of interest receivable and amortization of premium on October 31, 2014 (rouond answer to the nearest whole number).
3, Show all financial statement effects of this long-term bond investment on Housemann Insurance Corp's balance sheet at October 31, 2014, and income statement for the year ending October 31, 2014.
Explanation / Answer
Date Account Debit credit
01 Jan 2014 Long term Investment Bonds 2600000
01 Jan 2014 Premium on Int Bonds 364000
01 Jan 2014 To Cash 2964000
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Date Account Debit Credit
01 Jul 2014 Cash 130000
01 Jul 2014 To Interest Revenue 130000
Date Account Debit credit
01 Jul 2014 Interest Revenue 18200
01 Jul 2014 To Premium on Int Bonds 18200
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Date Account Debit credit
31 Oct 2014 Accrued Interest 8667
31 Oct 2014 To Interest Revenue 8667
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Housemann Insurance Corp's balance sheet at October 31, 2014.
Liabilities | Assets
|
Premium paid on | Long term Investment Bonds 2600000
Bonds Purchased 345800 | Accrued Interest 8667
|
|
Income statement for the year ending October 31, 2014.
Revenues
a. Interest Revenue 216667
Less : Premium Paid on 60667
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Profit 156000
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