Question

On January 1, 2020, Hi and Lois Company purchased 12% bonds having a maturity value of $300,000 for $322,744.44. 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. Hi and Lois Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

Instructions
a. Prepare the journal entry at the date of the bond purchase.
b. Prepare a bond amortization schedule.
c. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2020.
d. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2021.

Answer 1

The answer includes the journal entries for the bond purchase, bond amortization schedule, and interest revenue and amortization for two years.

Step-by-step explanation:

To answer this question, we need to follow the instructions one by one:

a. Journal entry at the date of the bond purchase:

Debit: $322,744.44 (Bonds Payable)

Credit: $300,000 (Bonds Payable, Maturity Value)

Credit: $22,744.44 (Discount)

b. Bond Amortization Schedule:

In this schedule, we will calculate the bond interest expense and amortization using the effective-interest method.

c. Journal entry to record interest revenue and amortization at December 31, 2020:

Debit: $22,744.44 (Discount)

Credit: $2,274.44 (Interest Revenue)

Credit: $20,470 (Amortization)

d. Journal entry to record interest revenue and amortization at December 31, 2021:

Debit: $22,744.44 (Discount)

Credit: $2,274.44 (Interest Revenue)

Credit: $20,470 (Amortization)

Answer 2

a. Prepare the journal entry at the date of the bond purchase.

January 1, 2020, bonds purchased at a premium

Dr Bonds receivable 300,000

Dr Premium on bonds receivable 22,744.44

Cr Cash 322,744.44

b. Prepare a bond amortization schedule.

Date Interest Cash Premium Unamortized Carrying

revenue received amortization premium value

1/1/20 - -322,744.44 - 22,744.44 277,255.56

1/1/21 32,274.44 36,000 3,725.56 19,018.88 280,981.12

1/1/22 31,901.89 36,000 4,098.11 14,920.77 285,079.23

1/1/23 31,492.08 36,000 4,507.92 10,412.85 289,587.15

1/1/24 31,041.23 36,000 4,958.77 5,454.08 294,545.92

1/1/25 30,545.92 336,000 5,454.08 0 0

c. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2020.

Dr Interest receivable 36,000

Cr Interest revenue 32,274.44

Cr Premium on bonds receivable 3,725.56

(322,744.44 x 10%) - (300,000 x 12%) = 32,274.44 - 36,000 = 3,725.56

d. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2021.

Dr Interest receivable 36,000

Cr Interest revenue 31,901.89

Cr Premium on bonds receivable 4,098.11

(319,018.88 x 10%) - (300,000 x 12%) = 31,901.89 - 36,000 = 4,098.11

amortization year 3:

(314,920.77 x 10%) - (300,000 x 12%) = 31,492.08 - 36,000 = 4,507.92

amortization year 4:

(310,412.85 x 10%) - (300,000 x 12%) = 31,041.23 - 36,000 = 4,958.77

amortization year 5:

5,454.08