Question

On August 1, 2021, Fowler Company acquired $500,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2021, and mature on April 30, 2026, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2021?

a) Debt Investments: 500,000 | Premium on Bonds: 32,500 | Cash: 532,500
b) Debt Investments: 520,000 | Interest Revenue: 12,500 | Cash: 532,500
c) Debt Investments: 532,500 | Interest Revenue: 12,500 | Cash: 520,000
d) Debt Investments: 532,500 | Cash: 532,500

Answer 1

b) Debt Investments: 520,000 | Interest Revenue: 12,500 | Cash: 532,500

Step-by-step explanation:

The journal entry to record the purchase of the bond is shown below:

Debt investment Dr $500,000 × 1.04) $520,000

Interest revenue Dr ($500,000 × 10% × 3 ÷ 12) $12,500

To Cash $532,500

(being the purchase of the bond is recorded)

Here the debt investment and interest revenue is debited as it increase the assets and decreased the revenue while on the other hand the cash is credited as it decreased the assets

Hence, the correct option is b.