Question

On January 1, 2017, Mario Corp. acquired 8%, $100,000 (face value) bonds of Luigi Ltd., to yield 6%. The bonds were dated January 1, 2017, and mature on December 31, 2019, with interest payable each January 1. Mario intends to hold the bonds to maturity, and will use the FV–NI model and the effective interest method of amortization of bond premium or discount.

Required

Prepare the following entries in Mario’s books:

a) Acquisition of bonds on January 1, 2017,

b) Year-end adjusting entry at December 31, 2017,

c) Receipt of the first interest payment on January 1, 2018.

Answer 1

Solution a:

Computation of bond price
Table values are based on:
n=	3
i=	6%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.83962	$100,000	$83,962
Interest (Annuity)	2.67301	$8,000	$21,384
Price of bonds			$105,346

Journal Entries - Mario Corp.
Date	Particulars	Debit	Credit
1-Jan-17	Investment in Bond Dr	$105,346.00
	Premium on bond investment Dr		$100,000.00
	To Cash		$5,346.00
	(To record bond investment)

Solution b:

Journal Entries - Mario Corp.
Date	Particulars	Debit	Credit
31-Dec-17	Interest receivables Dr	$8,000.00
	To Interest revenue ($105,346*6%)		$6,321.00
	To Premium on bond investment		$1,679.00
	(To record interest revenue)

Solution c:

Journal Entries - Mario Corp.
Date	Particulars	Debit	Credit
1-Jan-18	Cash Dr	$8,000.00
	To Interest receivables		$8,000.00
	(To record interest receipt)