Question

On January​ 1,2016 Gentle Touch Learning pays $200,000 to buy 2​ $100,000 face​ value, 66​% interest, 20-year James Company bonds. These bonds pay interest​semi-annually on June 30 and December 31. Smart Touch Learning intends to hold the bonds for a few years and sell them when they need more cash. The entry to record the purchase of the bonds on January 1 would include a

A. Debit to​ Long-Term Investments-Available-for-Sale 200,000

B. Debit to​ Long-Term Investment-Held-to-Maturity 200,000

C. None of the above

Answer 1

Answer is (a) : Debit to Long term Investments - Available for Sale

The bonds have been purchased with an intent to sell as per cash requirement. This means they are available for Sale and can be sold as and when requirement arises.

Reasons for incorrect answer:

(B) Held to Maturity : Here, the intent is to hold the bonds ill maturity. In current case, intention is to sell after few years to generate cash

There is one more category of bond which is Trading bond. Here, the intention is to buy and sell bonds for generating profits. This means the bonds are bought and sold within short periods to earn profit. In the current case, intention is to sell after few years to generate cash