Question

On January 1, 2017, 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, 2017, and mature January 1, 2022, with interest receivable 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.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, 2017
d. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2018

Answer 1

a. January 1, 2017, bonds are purchased at a premium

Dr Investment in bonds 300,000

Dr Premium on bonds receivable 22,744.44

Cr Cash 322,744.44

b.

Date Cash Interest Amortization Bond Carrying

received revenue of premium premium value

1/1/18 $36,000 $32,274.44 $3,725.56 $19,018.88 $280,981.12

1/1/19 $36,000 $31,904.89 $4,095.11 $14,923.77 $285,076.23

1/1/20 $36,000 $31,492.38 $4,507.62 $10,416.15 $289,583.85

1/1/21 $36,000 $31,041.61 $4,958.39 $5,457.76 $294,542.24

1/1/22 $36,000 $30,542.24 $5,457.76 $0 $300,000

amortization of bond premium = ($322,744.44 x 10%) - $36,000 = -$3,725.56

amortization of bond premium = ($319,018.88 x 10%) - $36,000 = -$4,095.11

amortization of bond premium = ($314,923.77 x 10%) - $36,000 = -$4,507.62

amortization of bond premium = ($310,416.15 x 10%) - $36,000 = -$4,958.39

amortization of bond premium = $10,416.15 - $4,958.39 = -$5,457.76

c.

December 31, 2017

Dr Interest receivable 36,000

Cr Interest revenue 32,274.44

Cr Premium on bonds receivable 3,725.56

d.

December 31, 2017

Dr Interest receivable 36,000

Cr Interest revenue 31,904.89

Cr Premium on bonds receivable 4,095.11