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 would receive interest payment on July 1, 2012 so the price of $1,120 included all accrued interest already. It's considered as a temporary investment. At the date of purchase, Pawnee should credit cash for $112,000, and:

I. debit Marketable Debt Securities for $112,000.
II. debit Marketable Debt Securities for $107,000.
III. debit Marketable Debt Securities for $100,000.
IV. debit Bond Premium for $7,000.
V. debit Interest Revenue for $5,000.
A. III, IV and V only
B. II and V only
C. none is correct
Explanation: The accrued interest should be 5/12 x 0.12 x $1,000 x 100 = $5,000.It should be debited to Interest Revenue.
Generally, the discount or premium on temporary investment is not recorded separately in the accounts and not amortized because the investment is ordinarily held for only a short time and hence any amount would be immaterial.

User Contributed Comments 6

User Comment
kalps You should only recignise the accrued amount in interest income on the purchase i.e. 5/12 X 0.12 * 12000
murli Good one - Investment a/c CANNOT be debited with interest accrued so reflecting a clean price!
ThePessimist Kalps, the face value was $10,000, so the accrued income would be 5/12 x 0.12 x 10000 = $5,000
treakj This is difficult. When you bought the bond at 112, 5 is already included in the bond. So, 5 will be recorded as receivable, 107 as a marketable security. In July, you will receive 6, but you can't just say it is entirely interest revenue. So, you record debit on interest revenue of 5 to adjust this point.
Stoibayev Such a BS question. What do you mean by "generally premium and discounts are not recorded separately"? I do not like the general part in itself. And, in fact, they are recorded like that most of the time. Moreover, FV adjts are recorded in separate accounts as well... You know that makes accountants' life easier...
Stoibayev And, it is not difficult question... it is just BS question.
You need to log in first to add your comment.