On January 1, 2017, Hi and Lois Company purchased 12% bonds having a maturity value of \(300,000 for \)322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Hi and Lois Company uses the effective interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

Instructions

(a) Prepare the journal entry at the date of the bond purchase.

(b) Prepare a bond amortization schedule.

(c) Prepare the journal entry to record the interest revenue and the amortization at December 31, 2017.

(d) Prepare the journal entry to record the interestand the amortization at December 31, 2018.

Short Answer

Expert verified

The debt investment Account was debited with $322,744.44, and the interest revenue account was credited with $32,274.44 and $31,901.89.

Step by step solution

01

Step 1

Held-to-Maturity securities are those securities that are kept held till the date of maturity.

02

Entry of bond purchase

Date

Description

Debit

Credit

January 1, 2017

Debt Investment

$322,744.44

Cash

$322,744.44

Being entry to record the purchase of bonds.

03

Bond amortization schedule

Date

Cash Received

Interest Revenue

Discounted Amortized

Carrying Amount of Bond

January 1, 2017

$322,744.44

January 1,2018

36,000

$32,274.44

$3,725.56

$319,018.88

January 1,2019

36,000

$31,901.89

$4098.11

$314,920.77

January 1,2020

36,000

$31,492.07

$4,507.93

$310,410.84

January 1,2021

36,000

$31,041.28

$4,958.72

$305,452.12

January 1,2022

36,000

$30,545.21

$5,454.79

$300,000

04

Entry of interest revenue

Date

Description

Debit

Credit

December 31, 2017

Cash

$36,000

Held-to-maturity Securities

$3,725.56

Interest Revenue

$32,274.44

Being the entry for bond interest.

05

Entry of interest revenue

Date

Description

Debit

Credit

December 31, 2018

Cash

$36,000

Held-to-maturity Securities

$4,098.11

Interest Revenue

$31,901.89

Being the entry for bond interest.

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