Question

exercise 15 - 5 (algo) accounting for available - for - sale debt securities lo p3
prepare krum companys journal entries to record the following transactions involving its short - term investments in available - for - sale debt securities, all of which occurred during the current year.
a. on august 1, paid $76,000 cash to purchase houttes 9%, six - month debt securities ($76,000 principal), dated august 1.
b. on october 30, received a check from houtte for 90 days interest on the debt securities in transaction a.
note: use 360 days in a year. do not round your intermediate calculations.
view transaction list
journal entry worksheet
1 2
on august 1, paid $76,000 cash to purchase houttes 9% six - month debt securities ($76,000 principal), dated august 1.
note: enter debits before credits.

Explanation:

Step1: Record purchase of debt securities

When purchasing debt securities, the investment account is debited (increase in asset) and cash is credited (decrease in asset).
Debit: Available - for - Sale Debt Securities $76,000
Credit: Cash $76,000

Step2: Calculate interest amount

The formula for simple interest is $I = P\times r\times t$, where $P=\$76,000$ (principal), $r = 9\%=0.09$ (annual interest rate), and $t=\frac{90}{360}$ (time in years).
$I=76000\times0.09\times\frac{90}{360}$
$I = 76000\times0.09\times0.25$
$I=\$1,710$

Step3: Record receipt of interest

When receiving interest, cash is debited (increase in asset) and interest revenue is credited (increase in revenue).
Debit: Cash $1,710$
Credit: Interest Revenue $1,710$

Answer:

For transaction a:

Transaction	General Journal	Debit	Credit
	Cash		$76,000

For transaction b:

Transaction	General Journal	Debit	Credit
	Interest Revenue		$1,710