Journal Entries Exercises

Brief Exercise 17-3

Carow Corporation purchased, as a held-to-maturity investment, $70,500 of the 10%, 7-year bonds of Harrison, Inc. for $77,947, which provides a 8% return. The bonds pay interest semiannually.

Prepare Carow’s journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual interest and premium amortization. Assume effective-interest amortization is used.

No. Account Title and Explanation Debit Credit
a Debt Investment (Held-to-Maturity)

Cash

$77,947  

$77,947

 

No. Account Title and Explanation Debit Credit
b Cash ($70,500 × 0.1 × 6/12)

Debt Investment (Held-to-Maturity)

Interest revenue ($77,947 × 0.08 × 6/12)

$3,525  

$407

$3,118

 

Brief Exercise 17-4

Hendricks Corporation purchased trading investment bonds for $58,780 at par. At December 31, Hendricks received annual interest of $2,120, and the fair value of the bonds was $56,010.

Prepare Hendricks’ journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

No. Account Title and Explanation Debit Credit
a Debt Investment

Cash

$58,780  

$58,780

 

No. Account Title and Explanation Debit Credit
b Cash

Interest Revenue

$2,120  

$2,120

 

No. Account Title and Explanation Debit Credit
c Unrealized Holding Gains or Loss-Income

Fair Value Adjustment (Trading)

($58,780 – $56,010)

$2,770  

$2,770

Exercise 17-2

On January 1, 2013, Dagwood Company purchased at par 11% bonds having a maturity value of $319,900. They are dated January 1, 2013, and mature January 1, 2018, with interest receivable December 31 of each year. The bonds are classified in the held-to-maturity category.

(a) Prepare the journal entry at the date of the bond purchase.
(b) Prepare the journal entry to record the interest received for 2013.
(c) Prepare the journal entry to record the interest received for 2014.
     

 

No. Account Title and Explanation Debit Credit
(a)    Jan. 1, 2013 Investment in Bonds

Cash

$319,900  

$319,900

 

No. Account Title and Explanation Debit Credit
(b)   Dec. 31, 2013 Cash

Interest Income ($319,900 × 0.11)

$35,189  

$35,189

 

No. Account Title and Explanation Debit   Credit
(c)    Dec. 31, 2014 Cash

Interest Income

$35,189  

$35,189

 
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