On February 1,2014,ABC purchased 10 $1,000,12 percent bonds at 96 as a short-term investment.Interest is payable semi-annually on July 1 and January 1 of each year.How much cash did ABC spend on February 1,2014? What amount should be debited to the investment account? $\begin{array}{|l|l|l|}
\hline& \text { Total Cash Spent } & \text { Debit to Investment Account } \
\hline 1) & \$ 10,100 & \$ 10,000\
\hline2) & \$ 9,600 & \$ 9,700 \
\hline3) & \$ 9,700 & \$ 9,600 \
\hline4) & \$ 10,000 & \$ 10,100\\hline
\end{array}$

Question

On February 1,2014,ABC purchased 10 $1,000,12 percent bonds at 96 as a short-term investment.Interest is payable semi-annually on July 1 and January 1 of each year.How much cash did ABC spend on February 1,2014? What amount should be debited to the investment account? $\begin{array}{|l|l|l|} 
\hline& \text { Total Cash Spent } & \text { Debit to Investment Account } \
\hline 1) & \$ 10,100 & \$ 10,000\
\hline2) & \$ 9,600 & \$ 9,700 \
\hline3) & \$ 9,700 & \$ 9,600 \
\hline4) & \$ 10,000 & \$ 10,100\\hline
\end{array}$

Quizplus · Accepted Answer

ABC purchased the bonds at 96% of the face value, so they spent $9,600 (10 bonds x $1,000 x 0.96). The debit to the investment account should be the purchase price of $9,600. However, since the bonds were purchased between interest payment dates, accrued interest of $100 (one month's interest on $10,000 at 12% annually) is also paid, making the total cash spent $9,700.

On February 1,2014,ABC Purchased 10 $1,000,12 Percent Bonds at 96