Question

Travis Company has just completed its financial statements for the reporting year ended December 31, 2019. The accounts have not yet been closed. The company always uses the straight-line method for any cost allocations. Prepare any correcting and adjusting entries that should be made on December 31, 2019. Ignore income taxes.

On January 1, 2014, a long-term investment of $18,000 was made by purchasing a $20,000, 8% bond of XT Corporation (interest payable on December 31). The investment account was debited $18,000. Each year, starting on December 31, 2014, the company has recognized investment revenue on these bonds of $1,600. The bonds mature ten years from the date of purchase.

Answer 1

When investment made in long term bond at a discount , investment will be debited with the par amount while the difference will be transferred to discount or premium account.

Hence in this case investment should have been recorded at $20000. And $2000 should have been to discount account.

Then at the end of year discount will be amortized based on life of investment. Since life is 10 years.

$2000/10 = $200 should have been transferred to interest revenue.

Hence there are two mistakes

1. Recording of investment at $18000 instead of $20000

2. Recording of interest revenue at $1600 instead of $1800.

Following rectifying entries are required

Particulars	Debit	Credit
Investment account	$20000
Discount account		$20000
Discount account	$200
Interest revenue		$200