Purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Sold $250,000 of bonds at 97. The journal entry for the purchase would include:

Question

Quizplus · Accepted Answer

When bonds are purchased at a price that includes accrued interest, the interest has been earned by the seller of the bonds up to the date of sale. Therefore, the purchaser will need to record the accrued interest as part of the cost of the investment. A debit to Investment in ABC Co. Bonds for $404,500 ($400,000 cost plus $4,500 accrued interest) would be recorded, along with a credit to Cash for $404,500. Additionally, interest revenue will be recognized as it accrues over the life of the bond. At the time of purchase, no interest has been earned yet, so no interest revenue is recorded. Instead, the credit should be to Interest Receivable (liability) to reflect the amount of interest that has accrued but not yet been received. Therefore, choice C is the correct answer.