Kern Company purchased bonds with a face amount of $800,000 between interest payment dates. Kern purchased the bonds at 102, paid brokerage costs of $12,000, and paid accrued interest for three months of $20,000. The amount to record as the cost of this long-term investment in bonds is

Question

Quizplus · Accepted Answer

The cost of the investment is equal to the purchase price plus any transaction costs. Therefore, the cost of the bonds is:
Purchase price = $800,000 × 1.02 = $816,000
Brokerage costs = $12,000
Accrued interest = $20,000
Total cost = $816,000 + $12,000 + $20,000 = $848,000
However, the accrued interest must be added to the premium on bonds payable account, not to the cost of the investment. Therefore, the cost of the investment in bonds is $816,000 + $12,000 = $828,000.

Kern Company Purchased Bonds with a Face Amount of $800,000