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Salt Foods purchases forty $1,000, 7%, 10-year bonds issued by Pretzelmania, Inc., for $40,000 on January 1. The market interest rate for bonds of similar risk and maturity is 7%. Salt Foods receives interest semiannually on June 30 and December 31. 1. & 2. Record the necessary entries regarding the bonds. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

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The Salt Foods Company will record the necessary journal entries regarding the bonds for the first year and at maturity as follows:

Journal Entries:

January 1, Year 1:

Debit Investment in Bonds $40,000

Credit Cash $40,000

  • To record the purchase of the bonds.

June 30, Year 1:

Debit Cash $2,800

Credit Interest Revenue $2,800

  • To record the first interest receipt.

December 31, Year 2:

Debit Cash $2,800

Credit Interest Revenue $2,800

  • To record the second interest receipt.

At Maturity:

January 1, Year 11:

Debit Cash $40,000

Credit Investment in Bonds $40,000

  • To record the bond's retirement.

Data and Calculations:

Face value of bonds = $40,000 (40 x $1,000)

Payment for bonds =$40,000

Maturity period = 10 years

Coupon interest rate = 7%

Market interest rate = 7%

Issuance date = January 1, Year 1

Interest receipt dates = June 30 and December 31

January 1, Year 1: Investment in Bonds $40,000 Cash $40,000

June 30, Year 1: Cash $2,800 Interest Revenue $2,800

December 31, Year 2: Cash $2,800 Interest Revenue $2,800

January 1, Year 11: Cash $40,000 Investment in Bonds $40,000

Thus, interests of $2,800 will continue to be received twice yearly by Salt Foods for ten years.

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