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Chapter 12: Q17BE-1 (page 610)

Garfield Company purchased, on January 1, 2017, as a held-to-maturity investment, \(80,000 of the 9%, 5-year bonds of Chester Corporation for \)74,086, which provides an 11% return. Prepare Garfield’s journal entries for (a) the purchase of the investment, and (b) the receipt of annual interest and discount amortization. Assume effective-interest amortization is used.

Short Answer

Expert verified
  1. The amount debited to debt investment is $74,086.
  2. The amount of discount amortization is $949.

Step by step solution

01

Definition of discount amortization

Discount amortization is the process of reducing the cost of the bond in each period to show the reality of the bond.

02

Journal entry of the purchase of the investment

Date

Description

Debit

Credit

January 1, 2017

Debt Investment

$74,086

Cash

$74,086

Being entry to record the purchase of bonds

03

Journal entry for the receipt of annual interest and discount amortization

Date

Description

Debit

Credit

December 31, 2017

Cash

$7,200

Debt Investment

$949

Interest Revenue

$8,149

Being the entry for bond interest and amortization of the discount

Note:

Amortizationamount=Interestactualreceives-Expectedrateofreturn=11%of$74,086-9%of$80,000=$8,149-$7,200=$949

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