Travis Company has just completed its financial statements for the reporting year ended December 31, 2019....

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.

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Expert Solution

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

ekkarill92 answered 1 year ago

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