Question

On January 1, 2017, Metlock Company purchased 8% bonds having a maturity value of $240,000, for $260,219.71. The bonds provide the bondholders with a 6% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest receivable January 1 of each year. Metlock Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

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

2.)Prepare a bond amortization schedule.

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

4.)Prepare the journal entry to record the interest revenue and the amortization at December 21, 2018.

Answer 1

Solution:

Part :(1)

Journal entries at the date of the bond purchase

Pariculars	LF	Amount debit	Amount Credit
Debit investements		260,219.71
Cash			260,219.71
(Schedule of interest revenue and bond Premium amortization effective interest method)

Part 2:

Preparation of amortization schedule

Date	Cash Received (240,000*8%)	Interest Revenue (Carrying value*6%)	Premium Amoritzed (Cash received - interest revenue)	Carrying amount of bonds
1/1/2017	-	-	-	260,219.71
12/31/2017	19,200	15,613.18	3,586.81	256,632.8
12/31/2018	19,200	15,397.96	3,802.03	252,830.76
12/31/2019	19,200	15,169.84	4,030.15	248,800.60
12/31/2020	19,200	14,928.03	4,271.96	244,528.63
12/31/2021	19,200	14,671.71	4,528.28	240,000.00

Part :3

Journal enter to record the interest revenue and the Amortization at December 31, 2017

Pariculars	LF	Amount (debit)	Amount (Credit)
Debit investment		19,200.00
Interest revenue			3,586.81
			15,613.09

Part : 4

Journal enter to record the interest revenue and the Amortization at December 31, 2018

Pariculars	LF	Amount (debit)	Amount (Credit)
Debit investment		19,200.00
Interest revenue			3,802.03
			15,397.97