Question

On July 1, 2019, Wolfpack Corporation purchased securities which it intends to buy and sell frequently. These securities consisted of Todd Corporation 10%, 5-year bonds with a face value of $21,000 which were purchased for $19,500. Assume that on December 31, 2019, Wolfpack received interest on the Todd Corporation bonds. Wolfpack uses the straight-line method to amortize premiums and discounts.

Required: Prepare the December 31 journal entry to record the receipt of the interest.

Answer 1

Journal entry on December 31 to record the receipt of interest =

Particulars Debit Credit

Cash account $1050

Investment in trading securities $150

Interest $1200

Note -

Cash Received =

Face value of security × interest rate × time

= $21000 × 10% × 6/12 months

= $1050

Amortization of discount to interest account =

Face value - purchase price / Number of years

= $21000 - $19500 /5 years

= $1500 / 5 years

= $300

= for 6 months =

$300 × 6/12 months

= $150

Since, amortization of discount is done on straight line basis, $150 will be amortized for 6 months.