Starbucks is a global company that provides high-quality coffee products. Assume that as part of its expansion strategy, Starbucks plans to open numerous new stores in Mexico in three years. The company has $7 million to support the expansion and has decided to invest the funds in corporate bonds until the money is needed. Assume that Starbucks purchased bonds with $7 million face value at par for cash on July 1 of the current year. The bonds pay 7 percent interest each June 30 and December 31 and mature in three years. Starbucks plans to hold the bonds until maturity.

Starbucks is a global company that provides high-quality coffee products. Assume that as part of its expansion strategy, Starbucks plans to open numerous new stores in Mexico in three years. The company has $7 million to support the expansion and has decided to invest the funds in corporate bonds until the money is needed. Assume that Starbucks purchased bonds with $7 million face value at par for cash on July 1 of the current year. The bonds pay 7 percent interest each June 30 and December 31 and mature in three years. Starbucks plans to hold the bonds until maturity.

Required:

1. What accounts are affected when the bonds are purchased on July 1 of the current year?

2. What accounts are affected when interest is received on December 31 of the current year?

3. Should Starbucks prepare a journal entry if the fair value of the bonds decreased to $6,000,000 on December 31 of the current year? 

Explanation:

1.

When the bonds are purchased, the company increases Held-to-Maturity Investments and decreases Cash.

2.

When interest is received on the investments, Cash increases and Interest Revenue increases. The bonds were purchased at par; the Held-to-Maturity Investments account is not affected.

3.

No journal entry is required. A decrease in the fair value of bonds in the held-to-maturity portfolio is not recorded.