Question

Metro Company purchased $100,000, 10%, 5-year bonds on January 1, 20x1, with interest payable on July 1 and January 1. The bonds sold for $108,111, which results in an effective interest rate of 8%. The market value on December 31, 20x1 was $105,000 and all bonds were sold for $107,500 on January 1, 20x2.

Required: Prepare journal entries on January 1, 20x1, July 1, 20x1, December 31, 20x1 and January 1, 20x2 assuming the bond investment is classified as

(Trading Security)

1/1/x1

7/1/x1

12/31/x1

1/1/x2

(Available-for-Sale Security)

1/1/x1

7/1/x1

12/31/x1

1/1/x2

(Held-to-Maturity Security)

1/1/x1

7/1/x1

12/31/x1

1/1/x2

Answer 1

1) Trading Security :

1/1/X1	Trading Bonds	$108111
	Cash		$108111
7/1/x1	Cash	5000
	Interest revenue		5000
12/31/X1	Interest receivable	5000
	Interest revenue		5000
1/1/X2	Cash	112500
	Loss on sale of bonds	611
	Trading Bonds		108111
	Interest receivable		5000

2) Available-for-Sale Security :

1/1/X1	Available-for-Sale Bonds	$108111
	Cash		$108111
7/1/x1	Cash	5000
	Interest revenue		5000
12/31/X1	Interest receivable	5000
	Unrealised Loss	3111
	Available-for-Sale Bonds		3111
	Interest revenue		5000
1/1/X2	Cash	112500
	Loss on sale of bonds	611
	Available-for-Sale Bonds		105000
	Interest receivable		5000
	Unrealised Loss		3111

3) Held-to-Maturity Security :

1/1/X1	Held-to-Maturity Bonds	$100000
	Premium on bonds	8111
	Cash		$108111
7/1/x1	Cash	5000
	Interest revenue		5000
12/31/X1	Interest receivable	5000
	Held-to-Maturity Bonds	5000
	Unrealised income		5000
	Interest revenue		5000
1/1/X2	Cash	112500
	Unrealised income	5000
	Loss on sale of bonds	611
	Held-to-Maturity Bonds		105000
	Interest receivable		5000
	Premium on bonds		8111