The following bond investment transactions were completed during a recent year by Starks Company: Year 1 Jan. 31 Purchased 75, $1,000 government bonds at 100 plus accrued interest of $375 (one month). The bonds pay 6% annual interest on July 1 and January 1. July 1 Received semiannual interest on bond investment. Aug. 30 Sold 35, $1,000 bonds at 98 plus $350 accrued interest (two months).

a. Journalize the entries for these transactions.
b. Provide the December 31, Year 1, adjusting journal entry for semiannual interest earned on the bonds.

Answer and Explanation:

The Journal entries is shown below:-

Jan 31

Investment in Govt Bonds Dr, $75,000

Interest Receivable Dr, $375  

      To Cash 75,375

(Being cash is recorded)

July 31

Cash Dr $2,250  

      To Interest Receivable $375

       To Interest Income 1,875

($75000 × 6% × 5 ÷ 12)

(Being interest on bond is recorded)

Aug 30

Cash Dr, $34,650

Loss on Sale of Bonds Dr, $700

($35,000 - 980 × $35)                

     To Investment in Govt Bonds $35,000

      To Interest Income $350

(Being loss on sale is recorded)

Dec 31

Interest Receivable Dr,  $1,200  

To Interest Income $1,200

(40 × $1,000 × 6% × 6 ÷ 12)

(Being interest on bonds is recorded)

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