Question

On January 1, 2020, Sunland Company purchased 8% bonds having a maturity value of $280,000, for $303,589.66. The bonds provide the bondholders with a 6% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Sunland Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

Required:
Prepare the journal entry at the date of the bond purchase.

Answer 1

January 1, 2020, bonds purchased at a premium

Dr Bonds receivable 280,000

Dr Premium on bonds receivable 23,589.66

Cr Cash 303,589.66

Step-by-step explanation:

Since the bonds were purchased at a price higher than the face value, they were purchased at a premium. If the bonds had been purchased at a price lower than face value, then they would have been purchased at a discount.