Question

Flynn Company purchased 60 Rinehart Company 12%, 10-year, $1,300 bonds on January 1, 2015, for $78,000. The bonds pay interest semiannually on July 1 and January 1. On January 1, 2016, after receipt of interest, Flynn Company sold 36 of the bonds for $42,900.
Prepare the journal entries to record the transactions described above

Answer 1

Answer:

Bond securities   78,000 debit

        cash                             78,000 credit

--purchase of the bonds--

cash            4,680 debit

      interest revenue    4,680 credit

--July 1st bond payment--

interest receivable 4,680 debit

      interest revenue    4,680 credit

--year-end accrued interest--

cash            4,680 debit

      interest receivable    4,680 credit

--payment of interest--

cash        42,900 debit

los on sale 3,900 debit

    bond securities   46,800 credit

--to record sale of the bonds--

Explanation:

we record the purchase at cost as we aren't rovided with information that Flynn will keep the bond until maturity

60 bonds x $1,300 each x 12% / 2 = 4,680 interest revenue

we record this for both interest payment

we must accrued the interest on December 31th as while the payment is on January 1st the interest were accrued from July 1st to Dece 31th so they belong to that accounting cycle.

proceeds_                        42,900

cost: 78,000 x 36/ 60  = (46,800)

loss on sale of debt securities (3,900)