Question

On April 1, 2018, FTL Corp purchased $500,000 of 6% bonds for $525,200 plus accrued interest as an available for sale security. Interest is paid on July 1 and January 1 and the bonds mature on July 1, 2023.

a) Prepare the journal entry on April, 2018

b) The bonds are sold on November 1, 2019 at 104 plus accrued interest. Amortization was recorded when interest was received by the straight line method (by months and round to the nearest dollar). Prepare all entries required to properly record the sale.

Answer 1

ANSWER:

Required a)

Apr 1, 2018	Debt Investments	525,200
	Interest Revenue [500,000 * 6% * (6 / 12)]	15,000
	To Cash		540,200

Required b)

Nov 1, 2019	Interest Rvenue [(25,200 / 63) * 4]	1,600
	To Debt Investment		1,600
	Cash {[(500,000 * 6%) / 12] * 4]	10,000
	To Interest Revenue		10,000
	Cash (500,000 * 1.04)	520,000
	To Gain on sale of investment		2,600
	To Debt Investment [525,000 - (25,200 / 63) * 19]		517,400

Amortization amount = 525,200 - 500,000 = $25,200

From April 1, 2018 to July 1, 2023 a total of 63 months exists.

Period of April 1, 2018 to Nov 1, 2019 = 19 months