Question

1) Select the correct entry for the following transactions for Oak Inc., which purchased a $10,000 bond issued by SD Inc., at par value on January 1, X1. The bond pays 5% interest, annually, starting January 1, X2 each year.

The purchase of the bond on January 1, X1

a. Debit Bond Payable $10,000, Credit Cash $10,000
b. Debit Cash, $10,000, Credit Bond Payable $10,000
c. Debit Bond Investment $10,000, Credit Cash $10,000 d. Debit Cash, $10,000, Credit Bond Investment $10,000

The accrual of interest receivable on December 31, X1

a. Debit Cash $500, Credit Interest Income $500
b. Debit Interest Expense, $500, Credit Cash $500
c. Debit Interest Receivable $500, Credit Bond Investment $500 d. Debit Interest Receivable, $500, Credit Interest Income $500

The receipt of interest on January 1, X2.

a. Debit Cash $500, Credit Interest Income $500
b. Debit Cash, $500, Credit Interest Receivable $500
c. Debit Interest Receivable $500, Credit Cash $500
d. Debit Interest Receivable $500, Credit Interest Income $500

The sale of the bond on January 2, x2 for $10,300 (ignore any interest that accrues during the first two days of the year).

a. Debit Cash $10,300, Credit Bond Investment $10,000, Credit Gain $300. b. Debit Cash, $10,300, Credit Bond Investment $10,300
c. Debit Cash $10,300, Credit Gain $10,300
d. Debit Cash, $10,300, Credit Interest Income $10,300

Answer 1

1) Select the correct entry for the following transactions for Oak Inc., which purchased a $10,000 bond issued by SD Inc., at par value on January 1, X1. The bond pays 5% interest, annually, starting January 1, X2 each year.

1. The purchase of the bond on January 1, X1

c. Debit Bond Investment $10,000, Credit Cash $10,000

Because the purchase of a bond means invest in a securities ( assets)., So increase in assets should debit according to accounting rule.

And decrease in assets should credit, here the cash is assets and it goes out.

2. The accrual of interest receivable on December 31, X1

d. Debit Interest Receivable, $500, Credit Interest Income $500

Here also follow that accounting rule, Interest is a income, if it accrued it is an current assets, increase in assets should debit.

If income increase should credit.

3. The receipt of interest on January 1, X2.

b. Debit Cash, $500, Credit Interest Receivable $500

If we get interest, it is increase the cash assets, so should debit, and interest income already recorded as receivables, if we get cash should decrease this assets, so credit the receivables.

4. The sale of the bond on January 2, x2 for $10,300 (ignore any interest that accrues during the first two days of the year).

a. Debit Cash $10,300, Credit Bond Investment $10,000, Credit Gain $300.

Here also cash are incoming, so increase in assets should debit. Bond investment is also assets, decrease in assets should credit. The difference between the purchase price and selling price is gain or loss, here the selling price are higher, so the gain, if increase in gain, should credit - same as income.