Question

On May 1, 2014, Kymier Corp. purchased $1,500,000 of 12% bonds—with interest payable on January 1 and July 1—for $1,406,500 plus accrued interest. The bonds mature on January 1, 2024. Amortization is recorded when interest is received by the straight-line method (by months and rounded to the nearest dollar). (Assume bonds are available for sale.)

Instructions: (a) Prepare the entry for May 1, 2018.

(b) The bonds are sold on August 1, 2019 for $1,412,500 plus accrued interest. Prepare all entries required to properly record the sale.

Answer 1

Kymier Company

1. Entries to record purchase and sale of securities:

Date	Account Titles and Explanation		Debit	Credit
1-May-14	Available-for-Sale Securities		$1,406,500
	Interest Revenue		$60,000
	Cash			$1,466,500
	(To record purchase of 12% bonds, accrued interest for 4 months - 1,500,000 x 12% x 4/12)
	Available-for-Sale Securities		$899
	Interest Revenue			$899
	(To record interest expense)
1-Aug-19	Cash		$15,000
	Interest Revenue			$15,000
	(To record interest expense on date of sale - August 1, 2019)
	Cash		$1,412,500
	Available for sale- securities			$1,406,500
	Gain on sale of securities			$6,000

Amortization = $1,500,000 - $1,406,500 = $93,500

The bond period (May 2014 – Jan 2024) is for 8 years 8 months = 12 x 8 + 8 = 104 months

Hence monthly interest revenue = $93.500/104 = $899

Interest revenue = 1,500,000 x12% x 1/12 = $15.000