Question

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

a.            February 1: The company purchased 9% bonds of Tempe Co. having a par value of $100,000 at 99 plus accrued interest. Interest is payable May 1 and November 1. Maturity date is 11/1/19.

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

c.            July 1: 10% bonds of Flagstaff, Inc. were purchased. These bonds with a par value of $50,000 were purchased at 104 plus accrued interest. Interest dates are May 1 and November 1. Maturity date is 11/1/19.

d.            November 1: Semiannual interest is received and amortization is updated on Tempe bonds.

e.            November 1: Semiannual interest is received and amortization is updated on Flagstaff bonds.

f.            December 31: Interest is accrued and amortization is updated on both investments.

Required:

Prepare journal entries for all dates. Present journal entries for the Tempe bonds (a, b, d, f), then journal entries for the Flagstaff bonds (c, e, f). No explanations or supporting computations are required. 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

The journal entries for Tempe Bonds are prepared as below:

Event	General Journal	Debit	Credit
a)	Investment - Tempe Co. (100,000*99%)	$99,000
	Interest Receivable (100,000*9%*3/12)	$2,250
	Cash		$101,250
	(To record purchase of bonds)
b)	Cash (100,000*9%*1/2)	$4,500
	Interest Receivable		$2,250
	Interest Revenue (4,500 - 2,250)		$2,250
	(To record receipt of interest for six months)
	Investment - Tempe Co. [(100,000 - 99,000)/21*3]	$143
	Interest Revenue		$143
	(To amortize the discount on purchase of bonds)
d)	Cash (100,000*9%*1/2)	$4,500
	Interest Revenue		$4,500
	Investment - Tempe Co. [(100,000 - 99,000)/21*6]	$286
	Interest Revenue		$286
	(To amortize the discount on purchase of bonds)
f)	Interest Receivable (100,000*9%*2/12)	$1,500
	Interest Revenue		$1,500
	(To record accrual of interest for two months)
	Investment - Tempe Co. [(100,000 - 99,000)/21*2]	$95
	Interest Revenue		$95
	(To amortize the discount on purchase of bonds)

____

The journal entries for Flagstaff Bonds are provided as follows:

Event	General Journal	Debit	Credit
c)	Investment - Flagstaff (50,000*104%)	$52,000
	Interest Receivable (50,000*10%*2/12)	$833
	Cash		$52,833
	(To record purchase of Bonds)
e)	Cash (50,000*10%*6/12)	$2,500
	Interest Revenue		$833
	Interest Receivable		$1,667
	(To record receipt of interest for six months)
	Interest Revenue [(52,000 -50,000)/16*4]	$500
	Investment - Flagstaff		$500
	(To amortize premium paid on purchase of bonds)
f)	Interest Receivable (50,000*10%*2/12)	$833
	Interest Revenue		$833
	(To record accrual of interest for two months)
	Interest Revenue [(52,000 -50,000)/16*2]	$250
	Investment - Flagstaff		$250
	(To amortize premium paid on purchase of bonds)