Question

On January 1, 2018, Kelly Corporation acquired bonds with a face value of $500,000 for $483,841.79, a price that yields a 10% effective annual interest rate, pay interest on June 30 and December 31, and are due December 31, 2021, and are being held to maturity.

Required:

Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the:

1.) straight line method of amortization

2.) effective interest method of amortization

Answer 1

Solution 1:

Effective rate of interest on bond = 10%, 5% semi annual

Face value = $500,000

Issue price = $483,841.79

Maturity period = 4 years, 8 semiannual period

Let semi annual interest payment = $X

Therefore

$X * Cumualtive PV factor at 5% for 8 periods + $500,000 * PV Factor at 5% for 8th period = $483,841.79

= $X * 6.463213 + $500,000 * 0.676839 = $483,841.79

X = $22,500

Therefore semiannual coupon rate = $22,500 / $500,000 = 4.50%

Annual coupon rate = 9%

Journal Entries - Kelly Corporation
Date	Particulars	Debit	Credit
1-Jan-18	Investment in Bond Dr	$500,000.00
	To Discount on bond		$16,158.21
	To Cash		$483,841.79
	(Being bond purchased)
30-Jun-18	CashDr ($500,000*9%*6/12)	$22,500.00
	Discount on bond Dr ($16,158.21/8)	$2,019.78
	To Interest Revenue		$24,519.78
	(To record interest receipt and discount amortization)
31-Dec-18	CashDr ($500,000*9%*6/12)	$22,500.00
	Discount on bond Dr	$2,019.78
	To Interest Revenue		$24,519.78
	(To record interest receipt and discount amortization)

Solution 2:

Journal Entries - Kelly Corporation
Date	Particulars	Debit	Credit
1-Jan-18	Investment in Bond Dr	$500,000.00
	To Discount on bond		$16,158.21
	To Cash		$483,841.79
	(Being bond purchased)
30-Jun-18	CashDr ($500,000*9%*6/12)	$22,500.00
	Discount on bond Dr	$1,692.09
	To Interest Revenue ($483,841.79*5%)		$24,192.09
	(To record interest receipt and discount amortization)
31-Dec-18	CashDr ($500,000*9%*6/12)	$22,500.00
	Discount on bond Dr	$1,776.69
	To Interest Revenue [($483,841.79+$1,692.09)*5%]		$24,276.69
	(To record interest receipt and discount amortization)