Question

The following bond investment transactions were completed during a recent year by Starks Company:

Year 1
Jan.	31	Purchased 72, $1,000 government bonds at 100 plus accrued interest of $540 (one month). The bonds pay 9% annual interest on July 1 and January 1.
July	1	Received semiannual interest on bond investment.
Aug.	30	Sold 48, $1,000 bonds at 97 plus $720 accrued interest (two months).

Required:

a.	Journalize the entries for these transactions. Refer to the Chart of Accounts for exact wording of account titles. Assume a 360-day year.
b.	Provide the December 31, Year 1, adjusting journal entry for semiannual interest earned on the bonds.

Journalize the entries for the transactions. Refer to the Chart of Accounts for exact wording of account titles. Assume a 360-day year.

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JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
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11		Adjusting Entries
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Answer 1

a)Journal entries for these transactions is as follows:

Date	Account and Explanation	Debit ($)	Credit($)
Jan.31	Investment in government bonds	72,000
	Interest Receivable	540
	Cash		72,540
	(Recorded the investment in bond with the one month interest )
July 1	Cash ($72,000 * 9% *6/12)	3,240
	Interest Receivable		540
	Interest Revenue		2,700
	(Recorded that semiannual interest on bond investment is received)
Aug.30	Cash (48 * $1,000 * 97% ) + $720	47,280
	Loss on sale of government bonds	1,440
	Interest Revenue		720
	Investment in government bonds		48,000
	(Recorded the sale of government bonds and the loss and Interest revenue)

b)Adjusting journal entry for semiannual interest earned on the bonds in the December 31, Year 1 is as follows:

Date	Account and Explanation	Debit($)	Credit($)
Dec.31	Interest Receivable ($72,000 - $48,000) * 9% * 6/12)	1,080
	Interest Revenue		1,080
	(Recorded the adjusting journal entry for semiannual interest earned on the bonds )