Starbucks is a rapidly expanding 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 five years. The company has $5 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 $5 million face value at par for cash on July 1, 2011. The bonds pay 8 percent interest each June 30 and December 31 and mature in five years. Starbucks plans to hold the bonds until maturity.
1. What accounts are affected when the bonds are purchased on July 1, 2011?
2. What accounts are affected when interest is received on December 31, 2011?
3. Should Starbucks prepare a journal entry if the market value of the bonds decreased to $4,000,000 on December 31, 2011? Explain.