Question

On January 1, 2020, Novotna Company purchased $400,000, 8% bonds of Aguirre Co. for $369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2025. Novotna Company uses the effective-interest method to amortize discount or premium. On January 1, 2022, Novotna Company sold the bonds for $370,726 after receiving interest to meet its liquidity needs.

Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale.

Answer 1

The purchase journal entry for Novotna Company's investment in Aguirre Co. bonds would include a debit to Investment in Bonds for $369,114, a debit to Bond Discount for $30,886, and a credit to Cash for $369,114, reflecting the purchase price and the discount to be amortized.

Step-by-step explanation:

When purchasing bonds, the purchase price is recorded along with any discounts or premiums. Noise, such as selling the bonds later, is irrelevant to the initial journal entry. The journal entry on January 1, 2020, for the purchase of Aguirre Co. bonds would be as follows: Debit Investment in Bonds: $369,114 Debit Bond Discount: $30,886 (which is the difference between the face value of $400,000 and the purchase price)

Credit Cash: $369,114 The bond discount of $30,886 represents the difference between the bond's face value and its purchase price and will be amortized over the life of the bond using the effective-interest method. The purchase is recorded at the price paid on the transaction date, setting up a bond discount account to account for the yield rate being higher than the coupon rate.