Question

(I have ONE hour) On January 1, 2020, Sandy Cheeks Corporation purchased $70,000, 7%, 14-year bonds as a long-term investment, paying $75,600 cash. The bonds pay interest semi-annually each June 30 and December 31. Sandy Cheeks uses the straight-line amortization method.

Part A:

Identify the following information:

Face Value

Stated Rate of Interest

Annual Stated Interest

Semi-annual stated interest

Purchase Price of Bonds

Was the bond purchased at a premium or discount?

What was the amount of the premium or discount?

Part B:

Give all of the necessary journal entries for Sandy Cheeks Corporation to account for the long-term bond investment for 2020.

General Journal
Date	Account Titles (Debits)	Account Titles (credits)	DR	CR

Part C:

Indicate the names and balances of the accounts to be reported on Sandy Cheek's financial statements at the end of 2020:

Income Statement:		Balance Sheet:
Name of Account	Amount	Name of Account	Amount

Part D:

Short Answer

Why are long-term investments in bonds (purchased as held to maturity securities) not adjusted to their fair market value at the end of each period?   

Answer 1

Part A:

Face value	$       70,000
Stated rate of interest	7% OR 0.07
Annual stated interest ($70000 X 0.07)	$         4,900
Semi-annual stated interest ($4900 X 1/2)	$         2,450
Purchase price of bonds	$       75,600
Premium or discount?	Premium
Amount of premium or discount ($75600 - $70000)	$         5,600

Part B:

General Journal
Date	Account Titles (Debits)	Account Titles (Credits)	DR	CR
Jan. 1, 2020	Bond investment	Cash	75600	75600
June 30, 2020	Cash	Investment in Bonds*	2450	200
		Interest revenue		2250
Dec. 31, 2020	Cash	Investment in Bonds*	2450	200
		Interest revenue		2250

*Investment in Bonds = $5600/(14 x 2) = $5600/28 = $200

Note: Premium and discount on bond investments is generally not shown separately. The amortization is thus directly credited to the bond investment account instead of a separate account.

Part C:

Income Statement:		Balance Sheet:
Name of Account	Amount	Name of Account	Amount
Interest revenue	$       4,500	Investment in Bonds	$       75,200

Interest revenue = $2250 + $2250 = $4500

Investment in Bonds = $75600 - $200 - $200 = $75200

Part D:

Since the long-term investments in bonds are expected to be held till maturity, the value of the same is not affected by the short-term fluctuations in market value and hence are not adjusted to their fair market value at the end of each period.