Question

On January 1, 2018, the College Corporation decides to invest in Small Town bonds. The bonds mature on December 31, 2022, and pay interest of 4% on June 30 and December 31. The market rate of interest was 4% on January 1, 2018, so the $20,000 maturity-value bonds sold for face value. College Corporation intends to hold the bonds until maturity. Journalize the transactions related to College Corporation’s investment in Small Town bonds during 2018.

Short answer

Both sides of the journal total$20,800.

Step-by-step solution

Definition of Interest Revenue

The benefits generated by interest fees charged on the amount given as a loan are known as interest revenue. It is calculated based on the specified percentage.

Journal Entries for Recording Investment

Date	Accounts and Explanation	Debit $	Credit $
1 Jan 2018	Held-to-maturity debt investment	$20,000
	Cash		$20,000
30 June 2018	Cash	$400
	Interest revenue		$400
31 Dec 2018	Cash	$400
	Interest revenue		$400
Total	$20,800	$20,800

Working note:

$\begin{array}{rcl}\mathrm{Interest}\mathrm{revenue}& =& \mathrm{Principal}\times \mathrm{Interest}\mathrm{rate}\times \frac{6}{12}\\ & =& \$20,000\times 4\%\times \frac{6}{12}\\ & =& \$400\end{array}$