Certainly! Let's prepare Krum Company's journal entries to record the transactions involving its short-term investments in available-for-sale debt securities.
### Transaction a: Purchase of Debt Securities
Date: August 1
Description: Krum Company paid [tex]$50,000 in cash to purchase Houtte's $[/tex]9\%[tex]$, six-month debt securities.
Journal Entry:
```
Date Account Debit Credit
August 1 Short-Term Investments $[/tex]50,000
Cash [tex]$50,000
```
Explanation:
- Debit Short-Term Investments: To recognize the investment in Houtte's debt securities.
- Credit Cash: To account for the payment made in cash.
### Transaction b: Receipt of Interest on Debt Securities
Date: October 30
Description: Krum Company received a check from Houtte for 90 days' interest on the debt securities purchased on August 1.
Calculations:
- Principal: $[/tex]50,000
- Annual Interest Rate: [tex]$9\%
- Days: 90 (Note: Using 360 days in a year for the calculation)
Interest earned over 90 days:
\[
\text{Interest Earned} = \left(\frac{\text{Principal} \times \text{Annual Interest Rate} \times \text{Days}}{360}\right) = \left(\frac{50,000 \times 0.09 \times 90}{360}\right) = \$[/tex]1,125
\]
Journal Entry:
```
Date Account Debit Credit
October 30 Cash [tex]$1,125
Interest Revenue $[/tex]1,125
```
Explanation:
- Debit Cash: To record the receipt of cash for the interest earned.
- Credit Interest Revenue: To recognize the revenue earned from the interest.
These journal entries accurately reflect the financial transactions of Krum Company concerning the short-term investments in Houtte's debt securities.
