On May 1, 2011, Stanton Company purchased $50,000 of Harris Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, 2011, Stanton received its first semiannual interest. On February 1, 2012, Stanton sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Stanton will record on February 1, 2012, will include:

Question

Quizplus · Accepted Answer

When Stanton sells $40,000 of bonds, it will receive $40,000 x 103% = $41,200, plus accrued interest of $40,000 x 12% x 8/12 = $3,200. However, Stanton only purchased $50,000 of bonds, so it must have $10,000 remaining in its portfolio. The journal entry to record the sale will be a debit to Cash for $41,200, a credit to Bonds Payable (or Investment in Bonds) for $40,000, a credit to Gain on Sale of Investments for $1,200 ($41,200 - $40,000 - $2,000), and a credit to Interest Revenue for $400 ($2,000 x 8/12). Therefore, the correct answer is B.

On May 1, 2011, Stanton Company Purchased $50,000 of Harris