Question

On March 31, 2018, Brodie Corporation acquired bonds with a par value of $300,000 for $313,650. The bonds are due December 31, 2023, carry a 9% annual interest rate, pay interest on June 30 and December 31, and are being held to maturity. The accrued interest is included in the acquisition price of the bonds. Brodie uses straight-line amortization.

Required:

1.	Prepare journal entries for Brodie to record the purchase of the bonds and the first two interest receipts.
2.	Next Level If Brodie failed to separately record the interest at acquisition, explain the errors that would occur in the company’s financial statements (no calculations are required).

Answer 1

1)

Date	Account title	Debit	credit
march 31,2018	Investment In bonds [313650-6750]	306900
	Interest receivable [300000*.09*3/12]	6750
	cash		313650
	[Being bond acquired at premium along with interest accrued for 3 months 1jan-31 march]
June30 2018	Cash [300000*.09*6/12]	13500
	Interest receivable		6750
	Interest revenue		6750
	[Being interest received for first semiannual month (6 months)
31 dec 2018	Cash	13500
	Interest revenue		13500
	[second semiannual interest received]

2)If The accrued interest is not seperately accounted , The investment in bond account (non current asset) will be overstated by $ 6750 at year end .At the same time ,all of the interest received for first semiannual month will be credited interest revenue account (since interest receivable account is not opened at acquisition) leading to higher/overstated net income (and so as higher equity)