Cardinal Paz Corp. carries an account in its general ledger called Investments,
ID: 2378925 • Letter: C
Question
Cardinal Paz Corp. carries an account in its general ledger called Investments, which contained debits for investment purchases, and no credits, with the following descriptions.
Sharapova Company common stock, $110 par, 220 shares
$43,800 April 1
U.S. government bonds, 10%, due April 1, 2022, interest payable April 1 and October 1, 113 bonds of $1,000 par each
113,000 July 1
McGrath Company 12% bonds, par $53,600, dated March 1, 2012, purchased at 104 plus accrued interest, interest payable annually on March 1, due March 1, 2032
57,888
Explanation / Answer
(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that all the securities are classified as available-for-sale (Credit account titles are automatically indented when amount is entered Do not indent manually)
Debt Investments (Available-for-Sale) Dr 168,744#
Equity Investments (Available-for-Sale) Dr 43,800
Interest Revenue ($53600*12%*4/12) Dr 2,144
Investments Cr 214,688
#($113000 + ($53600*1.04) = 168744)
(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2012, using the straight-line method
31 Dec12 Interest Receivable Dr 8,185
Debt Investments (Available-for-Sale) Cr (55)
@Interest Revenue Cr $8,240
@{Accrued interest from 1Mar-31Dec= $53600*12%*10/12 =$5,360
Bond Premium amortization (6/236)*2144 = 55
Accrued interest US Bond 1Oct-31Dec=$113000*10%*(3/12) = $2,825
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So Interest Revenue $8,240}
@Bond maturity is 20 Yrs ie 20*12 = 240 Months. As Bond was datd 1Mar but bought on 1Jul with accrued Interest, remianing period is 240-4 = 236 months.
Premium Paid = 53600*1.04-53600 = $2,144
So Premium amortization for 6month ie 1Jul-31Dec = (6/236)*2144