Question

In: Accounting

On January 1, 2019, Kelp Corporation acquired bonds with a face value of $700,000 for $677,829.11,...

On January 1, 2019, Kelp Corporation acquired bonds with a face value of $700,000 for $677,829.11, a price that yields a 11% effective annual interest rate. The bonds carry a 10% stated rate of interest, pay interest semiannually on June 30 and December 31, are due December 31, 2022, and are being held to maturity.

Required:

Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the:

1.	straight-line method of amortization
2.	effective interest method of amortization

Expert Solution

discount on investment = face value - purchase price

= 700000 - 677829.11

= 22170.89

straight line amortization per year

= discount / no of years to maturity

= 22170.89/4

= 5542.7225

for semi annual period = 5542.7225 / 2

= 2771.36125

= $ 2771 ( nearest dollar )

cash received as interest for semi-annual period = Face value * stated rate * (6/12)

= 700000 * 10% * (6/12)

= $ 35000

problem - 1

Straight line Amortization

Date	Accounts Name	Debit	Credit

1-Jan	investment in held to maturity debt securities	677829.11
	cash		677829.11

1-Jul	cash ( 70000010% 6/12 )	35000
	investment in held to maturity debt securities	2771
	interest revenue		37771

31-Dec	Cash	35000
	investment in held to maturity debt securities	2771
	interest revenue		37771

problem- 2

effective interest method amortization

Date (ddmmyyyy)	int on bonds (market rate) (11% * E)	Interest on bonds (cuponrate) (70000010%(6/12))	Amortization of bonds Discount	carrying value
	A	B	C (A-B)	E
	credit (interest revenue)	debit(Cash received )	debit (Discount on bonds)
1-Jan				677829.11
30-Jun	37280.60	35000.00	2280.60	680109.71
31-Dec	37406.03	35000.00	2406.03	682515.75

Date	Accounts Name	Debit	Credit

1-Jan	investment in held to maturity debt securities	677829.11
	cash		677829.11

1-Jul	cash ( 70000010% 6/12 )	35000
	investment in held to maturity debt securities	2280.6
	interest revenue		37280.6

31-Dec	Cash	35000
	investment in held to maturity debt securities	2406.03
	interest revenue		37406.03

ekkarill92 answered 2 years ago

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