The bonds pay $2,000 interest on July 1 and January 1 ($50,000 x 8% x ½). The July 1 entry is:
Date July 1 Account Titles and Explanation Cash Interest Revenue (To record receipt of interest on Doan Inc. bonds) Debit Credit
Consolidated financial Statements Valuation of debt and stock investments Short-term vs. long-term investments
STUDY OBJECTIVE 1 WHY CORPORATIONS INVEST Reason
2,000 2,000
It is necessary to accrue $2,000 interest earned since July 1 at year-end. The December 31 entry is:
Date Dec. 31 Account Titles and Explanation Interest Receivable Interest Revenue (To accrue interest on Doan Inc. bonds) Debit Credit
The entry to record the sale and recognize the gain is:
Date Jan. 1
Account Titles and Explanation
Debit 58,000
Credit 54,000 4,000
Cash Debt Investments Gain on Sale of Debt Investments (To record sale of Doan Inc. bonds)
CHAPTER 13 INVESTMENTS
STUDY OBJECTIVES
After studying this chapter, you should understand:
Why corporations invest in debt and stock securities
Accounting for debt investments Accounting for stock investments
2,000
2,000
RECORDING BOND INTEREST
When the interest is received on January 1, the entry is:
Date Jan. 1 Account Titles and Explanation Cash Interest Receivable (To record receipt of accrued interest) Debit Credit
REVIEW QBiblioteka ESTIONOn February 6, Hanes Company sells debt investments costing $26,000 for $28,000.
Date Jan. 1 Account Titles and Explanation Debt Investments Cash (To record purchase of 50 Doan Inc. bonds) Debit Credit
54,000 54,000
RECORDING BOND INTEREST
To house excess cash until needed
Typical Investment
Low-risk, high-liquidity, short-term securities such as governmentissued securities Debt securities (banks and other financial institutions); and stock securities (mutual funds and pension funds) Stocks of companies in a related industry or in an unrelated industry that the company wishes to enter
To generate earnings
I need 1,000 Treasury bills by tonight!
To meet strategic goals
STUDY OBJECTIVE 2
ACCOUNTING FOR DEBT INVESTMENTS
Debt investments = government and corporate bonds.
2,000 2,000
RECORDING SALE OF BONDS
On January 1, 2007, Kuhl Corporation receives net proceeds of $58,000 on the sale of the Doan Inc. bonds.
PROCEEDS – COST = GAIN or LOSS
Cost principle applies
Entries required for acquisition, interest revenue, and sale.
Cost includes all expenditures to acquire investment.
Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, 2006, for $54,000, including brokerage fees of $1,000. The entry to record the investment is: