Question

The following information relates to the HTM debt securities investments of Kiran Company during 2018:

a.   February 1: The company purchased 10% bonds of Tempe Co. having a par value of $150,000 at 97 plus accrued interest. Interest is payable on March 1 and September 1. Maturity date is 9/1/19

b.   March 1: Semiannual interest is received and amortization is updated.

c.   June 1: 9% bonds of Flagstaff were purchased. The bonds had a par value of $80,000 and were purchased at 105 plus accrued interest. Interest dates are Jan 1 and July 1. Maturity date is 1/1/20.

d.   July 1: Semiannual interest is received and amortization updated for the Flagstaff bonds.

e.   September 1: Semiannual interest is received and amortization updated for the Tempe bonds.

Required:

Prepare journal entries for all dates.  Use straight-line amortization. Do NOT use separate accounts for discounts and premiums; instead, net them into the Investments account. When computing amortization, round the monthly amortization amounts to the nearest cent. However, journal entry amounts can be rounded to the nearest dollar.

Answer 1

		Journal entries
	Sl.No	Date	Particulars	Debit amount	Credit amount
	a	01-Feb	10% bonds of Tempe Co.	$150,000
			Accrued interest on bonds ($150,000*10%*1/2*5/12)	$6,250
			To Discount on bonds ($150,000*3% (100%-97%)		4500
			To Cash ($150,000+$6,250-$4,500)		$151,750
			[Being Entry for purchase of 10% bonds at 97% + interest accrued accounted]
	b	01-Mar	Cash [$150,000*10%*1/2]	$7,500
			To interest income [[$150,000*10%*1/2*1/6]		$1,250
			To Accrued interest on bonds ($150,000*10%*1/2*5/6)		$6,250
			[Being Semiannual interest received]
		01-Mar	Discount on bonds ($4,500/20 months*1 month)	$225
			To interest income		$225
			[Being bond amortization is updated]
			Note: Bond amortization amount = Discount amount/Life of the bond* No. of completed months from date of purchase
			Life of bond = 1 february 2018 to 1 September 2019 = 20 months
			No. of completed months from date of purchase = 1 February 2018 to 1 March 2018 = 1 month
	c	01-Jun	9% bonds of Flagstaff.	$80,000
			Accrued interest on bonds ($80,000*9%*1/2*5/6)	$3,000
			Premium paid on bonds ($80,000*(105% -100%))	$4,000
			To Cash ($80,000+$3,000+$4,000)		$87,000
			[Being Entry for purchase of 9% bonds at 105% + interest accrued accounted]
	d	01-Jul	Cash [$80,000*9%*1/2]	$3,600
			To interest income [[$80,000*9%*1/2*1/6]		$600
			To Accrued interest on Flagstaff bonds ($80,000*9%*1/2*5/6)		$3,000
			[Being Semiannual interest received on Flagstaff bonds]
			Interest expense ($4,000/19 months*1 month)	$210
			To Premium paid on bonds		$210
			[Being bond amortization is updated on Flagstaff bonds]
			Note: Bond amortization amount = Discount amount/Life of the bond* No. of completed months from date of purchase
			Life of bond = 1 June 2018 to 1 January 2020 = 19 months
			No. of completed months from date of purchase = 1 June 2018 to 1 July 2018 = 1 month
	e	01-Sep	Cash [$150,000*10%*1/2]	$7,500
			To interest income [[$150,000*10%*1/2]		$7,500
			[Being Semiannual interest received on Tempe bonds]
			Discount on bonds ($4,500/20 months*6 months)	$1,350
			To interest income		$1,350
			[Being bond amortization is updated]
			Note: Bond amortization amount = Discount amount/Life of the bond* No. of completed months from previous interest paid to date to till date
			Life of bond = 1 february 2018 to 1 September 2019 = 20 months
			No. of completed months from date of purchase = 1March 2018 to 1 September 2018 = 6 months