CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Pawnee Inc. bought 100 bonds of Omaha Corporation for $1,120 each (face value $1,000, stated interest rate 12%, semi-annul payment) on June 1, 2012. It's considered as a temporary investment. It would receive interest payment on July 1, 2012 and the price of $1,120 included all accrued interest already. At the date of purchase, Pawnee should credit cash for $112,000, and:
A. debit Marketable Debt Securities for $107,000 and debit Interest Receivable for $5,000.
B. debit Marketable Debt Securities for $118,000 and credit Interest Revenue for $6,000.
C. debit Marketable Debt Securities for $100,000 and debit Interest Receivable for $12,000.
Explanation: The price included accrued interest of $5,000 for the past 5 months, and must be excluded from the Marketable Debt Securities account. When the interest of $6,000 was received in one month, Interest Revenue would be credited for $1,000 and Interest Receivable would be credited for $5,000.

User Contributed Comments 6

User Comment
quincy can anyone tell me why is debit Marketable Debt Securities and debit Interest Receivable? thought should be all Credit to...
min If you buy securities, you should debit the securities account (asset type). For the interest revenue account which has credit balance, as you are getting some revenues in advance, you should debit it also.
benlee Can anybody enlighten me on the what the "price of $1100 included accured interest..." refers to?
cb1979 It is the so-called dirty price of a bond, i.e. the quoted price (clean price) + accrued interest. The accrued interest is calculated pro rata since the last interest payment date.
bani007 I don't think so
If you by a security just a day before the interest is paid than tomorrow you will have a large amount of income
In this example you hold the security for 1 month and record the interest for 6 months.
Profache Interest = 12,000 per year = 1,000 per month.
Last interest was paid in 12/31, and the bond was purchased 5 months later, which has accrued 5,000 in interest not yet paid (receivable)
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