On January 1, 20X1, Stella Entity purchases bonds issued by Gragas Entity for $900,000. Stella Entity will receive an annual coupon payment of $75,000 and an additional $1,000,000 when the bond expires. On January 1, 20X3, Stella Entity is short on cash and needs to purchase new equipment to replace equipment that was destroyed in a factory fire. Stella Entity agrees with Cash Entity to sell all of its rights to future payments on the bond for $875,000. The value of the bond on the statement of financial position on January 1, 20X3 is $934,320. Provide the journal entries to reflect the purchase and eventual derecognition of the bonds.
Journal entry to record the purchase of Bond as on January 1, 20X1 by Stella Entity:
Investment in Bond Dr 900000
Cash Cr 900000
Journal entry for eventual derecognition of the bonds by Stella Entity:
Sale price of Bond as on January 1, 20X3 = 875000
Value of Bond as on January 1, 20X3 = 934320
Loss on sale of bond = Value of Bond - Sale price of Bond
= 934320 - 875000 = 59320
Cash Dr 875000
Loss on sale of investment Dr 59320
Investment in Bond Cr 934320
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