Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 months of $2,000 from Kennedy Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The entry to record the purchase of the bonds would include:
A.Interest Receivable debit $2,000
B.Investment in Bonds debit $202,000.
C.Cash credit $200,000
D.Interest Revenue credit $2,000.
int recivieable
The correct answer to record the purchase of the bonds would be:
C. Cash credit $200,000
Let's break down the journal entry and explanation:
1. We know that Jacks Corporation purchased $200,000 worth of bonds from Kennedy Company, so we need to credit the Cash account for $200,000. This reflects the outflow of cash from Jacks Corporation.
2. The other options do not correctly reflect the transaction:
A. Interest Receivable debit $2,000: This option suggests that Jacks Corporation has received $2,000 in interest, which is not accurate because interest is typically paid periodically, not immediately upon purchase.
B. Investment in Bonds debit $202,000: This option suggests that the total cost for Jacks Corporation to purchase the bonds was $202,000, which is incorrect since the cost of bonds was only $200,000.
D. Interest Revenue credit $2,000: This option suggests that Jacks Corporation has already earned $2,000 in interest, which is not accurate as the interest was accrued but not yet received.
To record the purchase of the bonds, the correct journal entry should be:
Debit: Investment in Bonds $200,000
Credit: Cash $200,000