On January 1, Highland Corporation purchased $85,000 of six percent, three-year
ID: 2385915 • Letter: O
Question
On January 1, Highland Corporation purchased $85,000 of six percent, three-year bonds as long-term investment. Iterest is paid annually. The company is not involved in active trading of securities.a. What accounts are increased and/or decreased by the purchase of this bond and by which amount?
b. What accounts are increased and/or decreased by the receipt of the first interest payment on the bonds in part A and by which amount?
c. Assuming the company intends to hold the bonds to maturity, what accounts are increased and/or decreased at the end of the first year if the market value of the bonds is $88,500 at that time?
d. How would your answer to part C differ if the company does not intend to hold the bonds to maturity?
e. What accounts would be increased and/or decreased at the end of the first year then and by what amount?
Explanation / Answer
On January 1, Highland Corporation purchased $85,000 of six percent, three-year bonds as long-term investment. Iterest is paid annually. The company is not involved in active trading of securities.
a. What accounts are increased and/or decreased by the purchase of this bond and by which amount?
investment ib bonds ---INCREASED ----------------AND WILL BE DEBITED BY $ 85 000
Cash---------------------------------------decreased and will be credited by $85000
b. What accounts are increased and/or decreased by the receipt of the first interest payment on the bonds in part A and by which amount?
Cash will increase by 5100 and will be debited
Interest income will increase by $5100 and will be credited.
c. Assuming the company intends to hold the bonds to maturity, what accounts are increased and/or decreased at the end of the first year if the market value of the bonds is $88,500 at that time?
No accounts wILL BE ------------------ affected.
d. How would your answer to part C differ if the company does not intend to hold the bonds to maturity?
Investment in bonds would have been increased by $3500 and would have been debited
e. What accounts would be increased and/or decreased at the end of the first year then and by what amount?
Unrealized gain on securities available for sale would been----------------------- increased by $8500 and credited