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On January 1, 20X1, Stella Entity purchases bonds issued by Gragas Entity for $900,000. Stella Entity...

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.

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Answer #1

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

Journal:

Cash Dr 875000

Loss on sale of investment Dr 59320

Investment in Bond Cr 934320

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