On April 1, 2011, Albert Company purchased $50,000 of Tetter Company’s 12% bonds at 100 plus accrued interest of $2,000. On June 30, 2011, Albert received its first semiannual interest. On February 1, 2011, Albert sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Albert will record on April 1, 2011 for the purchase of the bonds will include:
A.a credit to Interest Payable for $2,000.
B.a debit to Investments - Tetter Company for $52,000.
C.a credit for Cash of $50,000.
D.a debit to Investments - Tetter Company for $50,000.
The correct answer is D. a debit to Investments - Tetter Company for $50,000.
When Albert Company purchases the bonds from Tetter Company, it will record a journal entry to reflect the purchase. Since the bonds are being acquired, the Investments - Tetter Company account will be debited to indicate the increase in the investment. The amount of the purchase is $50,000, which is the cost of the bonds. Therefore, a debit for $50,000 will be made to the Investments - Tetter Company account.
To determine the journal entry that Albert will record on April 1, 2011, for the purchase of the bonds, you need to understand the nature of the transaction.
In this scenario, Albert Company purchased $50,000 of Tetter Company's 12% bonds at 100 plus accrued interest of $2,000. This means that Albert paid the face value of the bonds (100% of $50,000) and an additional amount for the accrued interest.
Let's break down the options to find the correct answer:
A. A credit to Interest Payable for $2,000: This option implies that there is an outstanding interest payment to be made. However, in the given scenario, Albert purchased the bonds at 100 plus the accrued interest, which means the accrued interest is already incorporated into the purchase price. Therefore, this option is incorrect.
B. A debit to Investments - Tetter Company for $52,000: This option correctly reflects the purchase price of the bonds ($50,000) and the accrued interest ($2,000). It represents the initial investment made by Albert in Tetter Company's bonds. Hence, this option is correct.
C. A credit for Cash of $50,000: This option only reflects the purchase price of the bonds and does not account for the accrued interest. As mentioned earlier, the purchase price includes the accrued interest. Therefore, this option is incorrect.
D. A debit to Investments - Tetter Company for $50,000: This option only accounts for the purchase price of the bonds. It does not include the accrued interest. Since Albert purchased the bonds at 100 plus the accrued interest, this option is incorrect.
Therefore, the correct answer is B. A debit to Investments - Tetter Company for $52,000.