Question

Problem 1. On January 1, 2019, Coco Corp. purchased $450,000 of 6% bonds, interest payable on January and July 1, for $428,800 (a 7% effective interest rate). The bonds mature on January 1, 2025. Record amortization and interest revenue on the appropriate dates by the effective-interest method (round to the nearest dollar). (Assume bonds are non-trading.)

Instructions
(a) Prepare the entry for January 1, 2019.
(b) The bonds are sold on October 1, 2019 for $427,000 plus accrued interest. Prepare all e required to properly record the sale.

Answer 1

(a) Prepare the entry for January 1, 2019.

Here is the journal entry for January 1, 2019:

Cash ($450,000 × 6% × 1/2) - $13,500
Investment in Bonds - $415,300
Premium on Bonds - $28,200

(b) The bonds are sold on October 1, 2019 for $427,000 plus accrued interest. Prepare all e required to properly record the sale.

Here is the journal entry for October 1, 2019:

Cash - $436,017
Investment in Bonds - $415,300
Premium on Bonds - $20,700
Gain on Sale of Bonds - $27,017

The amount of gain on sale is calculated as follows:

Selling price ($427,000 + $5,700) - Purchase price ($428,800) - Amortization ($1,083) = Gain on sale ($27,017).