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VanTrade Inc. invested $20,000 in 3-year bonds issued by WestEnd Finance Company. The bonds were purchased...

VanTrade Inc. invested $20,000 in 3-year bonds issued by WestEnd Finance Company. The bonds were purchased at par on January 1, 2015, and bear interest at a rate of 10% per annum, payable annually.
(a) Prepare the journal entry to record the initial investment on January, 2015.
(b) Prepare the journal entry that VanTrade would record on each interest date.
(c) Prepare the journal entry that VanTrade would record at maturity of the bonds.
(d) How much cash flowed "in" and "out" on this investment, and how does the difference compare to total interest income that was recognized?
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Answer #1
Journal entries
Date Debit transaction Credit transaction Debit ($) Credit ($)
(a) jan 1, 2015 Fixed investment in WestEnd Finance Bank/Cash 20000 20000
(b) 31st dec 2015 Cash/Bank Interest income 2000* 2000
(b) 31st dec 2016 Cash/Bank Interest income 2000 2000
(b) 31st dec 2016 Cash/Bank Interest income 2000 2000
(c) 1st jan 2016 Current investment in WestEnd Finance Fixed investment in WestEnd Finance 20000 20000

* Calculation of interest

20000*10/100 = 2000

(d) Cash Outflow = $ 20000

Cash inflow = investment + interest

20000 + (2000*3) = $26000

Diffrence in cash IN & cash OUT = 26000-20000 = $6000

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