Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold $250,000 of bonds at 97. The journal entry for the purchase would include a

A) credit to Interest Receivable for $4,500
B) credit to Interest Revenue for $4,500
C) debit to Interest Receivable for $4,500
D) debit to Interest Revenue for $4,500

Question

Annabelle Brewer · Accepted Answer

Final Answer : C, Explanation :  When purchasing bonds, the buyer must pay the accrued interest to the seller in addition to the purchase price. Therefore, the journal entry for the purchase would include a debit to Bonds Payable for $400,000 and a credit to Cash for $404,500 ($400,000 + $4,500). There is no revenue or receivable involved at the time of purchase.When selling bonds at a discount, the seller will receive less than the face value of the bonds. The journal entry for the sale would include a debit to Cash for $242,500 ($250,000 x 0.97) and a credit to Bonds Payable for $250,000, resulting in a loss on sale.

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