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Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8%, and interest is paid semiannually. The journal entry to record the receipt of interest on the next interest payment date would be:

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Answer:

C) Debit: Investment in Bonds $100,000 and Interest Receivable $1,500; Credit: Cash $101,500

Explanation:

Since Ruben purchased $100,000 worth of bonds and $1,500 of accrued interest, it means that he paid $101,500 for the bonds. Accrued interest increases the price of the bonds. This type of operation happens when you are trading bonds in secondary markets, since "new" bonds or recently issued bonds do not have accrued interest.

Dr Bonds 100,000

Dr Interest receivable 1,500

     Cr Cash 101,500

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