Question

On January 1, 2017, Pronghorn Company purchased 10% bonds having a maturity value of $380,000, for $410,343.38. The bonds provide the bondholders with a 8% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest receivable January 1 of each year. Pronghorn Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

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

Prepare a bond amortization schedule.

Prepare the journal entry to record the interest revenue and the amortization at December 31, 2017.

Prepare the journal entry to record the interest revenue and the amortization at December 31, 2018

Answer 1

Date	General Journal	Debit	Credit
Jan. 1, 2017	Investment in debt securities	380000.00
	Premium on bond investment	30343.38
	Cash		410343.38
	(To record purchase of bond investment)

Amortization Schedule:

Date	Cash received	Interest revenue	Premium Amortized	Carrying value
Jan. 1, 2017				410343.38
Jan. 1, 2018	38000	32827.47	5172.53	405170.85
Jan. 1, 2019	38000	32413.67	5586.33	399584.52
Jan. 1, 2020	38000	31966.76	6033.24	393551.28
Jan. 1, 2021	38000	31484.10	6515.90	387035.38
Jan. 1, 2022	38000	30964.62	7035.38	380000.00

Date	General Journal	Debit	Credit
Dec. 31, 2017	Interest receivable ($380000 x 10%)	38000.00
	Premium on bond investment		5172.53
	Interest revenue ($410343.38 x 8%)		32827.47
	(To record interest revenue and amortization of premium)
Dec. 31, 2018	Interest receivable ($380000 x 10%)	38000.00
	Premium on bond investment		5586.33
	Interest revenue ($405170.85 x 8%)		32413.67
	(To record interest revenue and amortization of premium)