Question

On January 1, 2020, Crane Company purchased 12% bonds having a maturity value of $430,000, for $462,600.36. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Crane Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

1. Prepare the journal entry at the date of the bond purchase.
2. Prepare a bond amortization schedule.

Answer 1

Answer and Explanation:

1. The journal entry is given below;

On Jan 1, 2020

Investment in bond Dr $430,000.00

Premium on bond investment Dr $32,600.36

To Cash $462,600.36

(being the investment in bond is recorded)

2. The preparation of the bond amortization schedule is presented below;

Date Cash Interest Premium Carrying amount of

Received revenue Amortized bonds

1-Jan-20 $462,600.36

1-Jan-21 $51,600.00 $46,260.04 $5,339.96 $457,260.40

(12% of $430,000)

1-Jan-22 $51,600.00 $45,726.04 $5,873.96 $451,386.44

1-Jan-23 $51,600.00 $45,138.64 $6,461.36 $444,925.08

1-Jan-24 $51,600.00 $44,492.51 $7,107.49 $437,817.59

1-Jan-25 $51,600.00 $43,782.41 $7,817.59 $430,000.00