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Q2SE_1

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Horngren'S Financial And Managerial Accounting
Found in: Page 567

Short Answer

Accounting for debt investments

On January 1, 2018, the Chaucer’s Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December 31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer’s intends to hold the bonds until December 31, 2023.

Requirements

1. Journalize the transactions related to Chaucer’s investment in Lake Turner bonds during 2018.

Both sides of the Journal total $93,600.

See the step by step solution

Step by Step Solution

Step 1: Definition of Bonds

Bonds can be defined as debt security issued with a specified maturity date and interest rate. Such securities require regular interest payment to their holders.

Step 2: Journal Entries Related to Chaucer’s Investment

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2018

Held to maturity – Debt Investment

$90,000

Cash

$90,000

30 June 2018

Cash

$1,800

Interest revenue

$1,800

31 Dec 2018

Cash

$1,800

Interest revenue

$1,800

$93,600

$93,600

Working note:

Calculation of Interest:

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