Question

On March 31, Ramesh Corp. invests in a $1,000, 6% bond to be held for short-term trading purposes, and accounts for this investment using the FV-NI method. The bond's fair value when acquired was $970, but an additional $10 was paid (and debited to Interest Receivable) representing the interest accrued since the annual interest payment date of February 1. Ramesh applies IFRS, does not report interest separately from other investment income, and prepares financial statements each December 31. The fair value of the bond on December 31 is $963 and on February 1, when Ramesh sells the bond, it is $961. Prepare journal entries to record (a) the purchase of the bond, (b) any December 31 adjustments needed, (c) the receipt of interest on February 1, and (d) the sale of the bond on February 1. Ramesh Corp. does not use reversing entries.

Answer 1

(a) on March 31 when bonds were purchased

Short term investment 970

Interest receivable 10

Cash 980

(purchased $1000 6% bonds for short term investment )

(b) Ajusting entry on 31 December

Interest receivables 55

Interest Income 55

(accrued interest for 11 months on bonds)

Rectification entry for interest receivables made at the time of purchase of bonds

Interest income 10

Interest receivables 10

Closing entry for interest income

Interest income 45

Income summary 45

Now fairvalue adjustent on December 31

Income summary 7

Short term investment 7

( this will result into the carryin amount of bonds $ 963)

(c) Entry on February 1

Cash 60

Interest Income 60

Sale of bonds

Cash 961

Loss on sale 2

Short term investment 963