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20 August, 07:18

On January 1, Skills Company purchased as a short-term investment a $1,000, 6% bondfor $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,200plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold? A. Cash ... 1,200 Debt Investments ... 1,200B. Cash ... 1,230 Debt Investments ... 1,000 Gain on Sale of Debt Investments ... 200 Interest Revenue ... 30C. Cash ... 1,230 Debt Investments ... 1,200 Interest Revenue ... 30D. Cash ... 1,200 Debt Investments ... 1,000 Gain on Sale of Debt Investments ... 200

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Answers (1)
  1. 20 August, 07:28
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    Option (B) is correct.

    Explanation:

    Interest accrued for 6 months (January 1 to July 1):

    = $1,000 * 6% * (6 : 12)

    = $30

    This shall be credited to interest revenue as this is the income of the investor.

    Sale value of investment:

    = Bond selling price on July 1 + Interest accrued for 6 months

    = $1,200 + $30

    = $1,230

    Gain on sale of investment:

    = (Selling price - Purchase price) - Accrued interest

    = ($1,230 - $1,000) - $30

    = $200

    Therefore, the Journal entry for this transaction is as follows:

    Cash A/c Dr. $1,230

    To debt investments $1,000

    To Gain on sale of investment $200

    To Interest revenue $30

    (To record the cash proceeds at the time the bond is sold)
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Home » Business » On January 1, Skills Company purchased as a short-term investment a $1,000, 6% bondfor $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,200plus accrued interest.
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