Question

In: Accounting

Assume that on September? 30, 2016?, Pontex?, ?Inc., purchased 5.5?% bonds of Clarkson Corporation at 96...

Assume that on September? 30, 2016?, Pontex?, ?Inc., purchased 5.5?% bonds of Clarkson Corporation at 96 as a? long-term, held-to-maturity investment. The maturity value of the bonds will be $ 24,000 on September? 30, 2021. The bonds pay interest on March 31 and September 30.

1) What method should PontexPontex use to account for its investment in the Clarkson Corp.? bonds?

a) amortized cost

b) consolidation

c) current market value

d) equity

(For 2-4 the accounts to choose from are Cash, Held to maturity investment in bonds, interest payable, interest receivable, interest revenue, and trading securities)

2) Using the? straight-line method of amortizing the discount on? bonds, journalize the purchase of the bonds in Clarksonon September? 30, 2016

3) Record the entry for the accrual of interest revenue on December? 31,2016.(Round to the nearest whole? dollar.)

4) Record the amortization of the bond discount on December? 31,2016.?(Round to the nearest whole? dollar.)

5) Show how Pontex would report everything related to the bond investment on its balance sheet at December? 31,2016.

Solutions

Expert Solution

1. a - amortized cost

Since the intention is to hold till maturity and earn the interest from the investments.

2.

Date Account description Debit Credit
30-Sep-16 Held to maturity investment in bonds $        23,040
Cash $        23,040
(To record Purchase of bonds)

3.

Date Account description Debit Credit
31-Dec-16 Interest receivable $              330
Interest revenue $              330
(To record accrual of Interest Revenue)
24000*5.5%*3/12 = 330

4.

Date Account description Debit Credit
31-Dec-16 Held to maturity investment in bonds $                48
Interest revenue $                48
((24000-23040)/5)/12*3

5.

Balance sheet(Partial)
Long Term Investment
Held to maturity investment $ 23,088
Current Assets
Interest Receivable $        330


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