Asked by Lauren Danner on Jun 12, 2024
Verified
Bay Company acquires 60 8% 5 year $1000 Community bonds on January 1 2017 for $60000. Assume Community pays interest on January 1. The journal entry at December 31 2017 would include a credit to
A) Interest Receivable for $2400.
B) Interest Receivable for $4800.
C) Accrued Expense for $4800.
D) Interest Revenue for $4800.
Interest Receivable
An asset account on the balance sheet representing the amount of interest income that has been earned but not yet received in cash.
Interest Revenue
Income earned by lending funds or allowing another entity to use your funds, such as interest from savings accounts, bonds, or loans receivable.
- Acquire knowledge on the accounting methods and documentation for the purchase, interest accumulation, and sale of debt investments.
- Gain insight into how corporate investments influence financial statements.
Verified Answer
ZK
Zybrea KnightJun 15, 2024
Final Answer :
D
Explanation :
The company acquired 60 bonds, each with a face value of $1000 and an 8% interest rate. This means that each bond will generate $80 of interest per year (1000 x 0.08). In total, the 60 bonds will generate $4800 of interest per year (60 x 80 x 1).
Since Community pays interest on January 1, the interest for the entire year will be accrued as of December 31. Therefore, at December 31, 2017, Bay Company will have earned $4800 of interest income. The journal entry will include a debit to Interest Receivable for $4800 and a credit to Interest Revenue for $4800.
Option A is incorrect because it only represents half of the interest that was earned. Option B is also incorrect because the interest earned is not an expense for Bay Company, but rather revenue. Option C is incorrect because the interest earned is not an accrued expense, but rather revenue earned.
Since Community pays interest on January 1, the interest for the entire year will be accrued as of December 31. Therefore, at December 31, 2017, Bay Company will have earned $4800 of interest income. The journal entry will include a debit to Interest Receivable for $4800 and a credit to Interest Revenue for $4800.
Option A is incorrect because it only represents half of the interest that was earned. Option B is also incorrect because the interest earned is not an expense for Bay Company, but rather revenue. Option C is incorrect because the interest earned is not an accrued expense, but rather revenue earned.
Learning Objectives
- Acquire knowledge on the accounting methods and documentation for the purchase, interest accumulation, and sale of debt investments.
- Gain insight into how corporate investments influence financial statements.
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