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Assume that on April 1, Jerome, Inc., paid $100,000 to buy Potter's 8 percent, two-year bonds with a $100,000 par value. The bonds pay interest semiannually on March 31 and September 30. Jerome intends to hold the bonds until they mature. Complete the necessary journal entry by selecting the account names from the pull-down menus and entering dollar amounts in the debit and credit columns.

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Answer:

Dr  Investment in bonds                $100,000

Cr Cash                                                            $100000

To record the purchase of investment in bonds

Explanation:

Since Jerome Inc. parted with $100000 in order to invest in the bonds,cash balance has reduced by $100000(a credit) and investment in bonds held to maturity account has increased by the same $100000(a debit)

Hence the journalized entries are

Dr  Investment in bonds                $100,000

Cr Cash                                                            $100000

To record the purchase of investment in bonds

However,interest is due on 30 September, the interest to be recognized on that date is shown by a way of journal entry below assuming the interest was received on that day:

The interest is calculated as :$100000*8%=$8000

Dr   Cash                               $8000

Cr Investment income                      $8000

If the interest was not received in cash, the journal entries would look like this:

Dr   Interest receivable                                $8000

Cr Investment income                                              $8000

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