Question

On January 1, 2018, the Chaucer’s Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December 31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer’s intends to hold the bonds until December 31, 2023.

Required:
a. Journalize the transactions related to Chaucer’s investment in Lake Turner bonds during 2018.
b. In what category would Chaucer’s report the investment on the December 31, 2018, balance sheet?

Answer 1

To journalize the transactions related to Chaucer’s investment in Lake Turner bonds during 2018, you would need to record three entries. Chaucer’s would report the investment in Lake Turner bonds on the December 31, 2018, balance sheet in the category of 'Investments' or 'Long-term Investments'.

Step-by-step explanation:

To journalize the transactions related to Chaucer’s investment in Lake Turner bonds during 2018, you would need to record the following entries:

1. On January 1, 2018, Debit Investment in Lake Turner Bonds and Credit Cash for the amount paid to purchase the bonds, which is $90,000.
2. On June 30, 2018, Debit Interest Receivable and Credit Interest Revenue for the amount of interest earned on the bonds.
3. On December 31, 2018, Debit Interest Receivable and Credit Interest Revenue for the second interest payment.

Chaucer’s would report the investment in Lake Turner bonds on the December 31, 2018, balance sheet in the category of 'Investments' or 'Long-term Investments'.

Answer 2

a)

January 1, 2018

Dr Investment in bonds 90,000

Cr Cash 90,000

June 30, 2018

Dr Cash 1,800

Cr interest revenue 1,800

December 31, 2018

Dr Cash 1,800

Cr interest revenue 1,800

b) This investment must be reported under long term assets since they are classified as Held to Maturity.