Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 12 Special Income and Investment Reporting Issues 551

Accounting for Bond Investments—Sale

Many long-term investments in bonds are sold before their maturity date. When this

occurs, the seller receives the sales price (less commissions and other selling costs) plus

any accrued interest since the last interest payment date. Before recording the cash pro-

ceeds, the seller should amortize any discount or premium for the current period up

to the date of sale. Any gain or loss on the sale is then recorded when the cash pro-

ceeds are recorded. Such gains and losses are normally reported in the Other Income

section of the income statement.

To illustrate, assume that the Deitz Corporation bonds in the preceding example

are sold for $47,350 plus accrued interest on June 30, 2014. The carrying amountof the

bonds (cost plus amortized discount) as of January 1, 2014 (78 months after their pur-

chase) is $47,868 [$41,706 + ($79 per month 78 months)]. The entries to amortize the

discount for the current year and to record the sale of the bonds are shown at the top

of the next page.

2007

July 1 Investment in Deitz Corporation Bonds 41,706

Interest Revenue 1,000

Cash 42,706

Purchased investment in bonds, plus

accrued interest.a

Oct. 1 Cash 2,000

Interest Revenue 2,000

Received semiannual interest for

April 1 to October 1.b

Dec. 31 Interest Receivable 1,000

Interest Revenue 1,000

Adjusting entry for interest accrued

from October 1 to December 31.c

31 Investment in Deitz Corporation Bonds 474

Interest Revenue 474

Adjusting entry for amortization of discount

for July 1 to December 31.d

Calculations:

aCost of $50,000 of Deitz Corporation bonds $41,706

Interest accrued ($50,000 8% 12 ––^3 ) 1,000

Total $ 42,706

b$50,0008%–– 126 $2,000

c$50,0008% 12 ––^3 $1,000

dFace value of bonds $50,000

Cost of bond investment 41,706

Discount on bond investment $ 8,294

Number of months to maturity (8^3 – 4 years12) 105 months

Monthly amortization ($8,294/105 months,

rounded to nearest dollar) $79 per mo.

Amortization for 6 months ($79 6) $474

Q.If the Deitz Corporation
bonds had been sold on
September 30 instead of
June 30, what would have
been the amount of the
loss?

A.$1,229 {$47,350 

[$48,342 + ($79  3

months)]}

interest payment. Entries in the accounts of Crenshaw Inc. at the time of purchase and

for the remainder of the fiscal period ending December 31, 2007, are as follows:

SCF BS IS

IT AcT SET RT

Oc AcSEc Rc

—AcSEc Rc

—AcSEc Rc