Question

On January 1, 2019, Rodgers Company purchased $400,000 face value, 10%, 3-year bonds for $390,009.00, a price that yields a 11% effective annual interest rate. The bonds pay interest semiannually on June 30 and December 31.

Required: 1. Record the purchase of the bonds.

2. Prepare an investment interest income and discount amortization schedule using the effective interest method.

3. Record the receipts of interest on June 30, 2019, and June 30, 2021.

Answer 1

1.

Date		Debit	Credit
January 01, 2019	Investment in Bonds	$ 390,009.00
	Cash		$ 390,009.00
	To record purchase of Pretzelmania Inc's bonds

2.

Date	Interest on Face Value @10%	Interest Revenue @11%	Amortization of Bond Discount	Balance in the Bond Discount	Investment in Bonds	Book Value of Bonds
	Debit Cash	Credit Interest Income	Debit Bond Discount
Jan 01, 2019				$     9,991.00	$ 400,000.00	$ 390,009.00
June 30, 2019	$    20,000.00	$                       21,450.50	$                       1,450.50	$     8,540.51	$ 400,000.00	$ 391,459.50
December 31, 2019	$    20,000.00	$                       21,530.27	$                       1,530.27	$     7,010.23	$ 400,000.00	$ 392,989.77
June 30, 2020	$    20,000.00	$                       21,614.44	$                       1,614.44	$     5,395.80	$ 400,000.00	$ 394,604.20
December 31, 2020	$    20,000.00	$                       21,703.23	$                       1,703.23	$     3,692.56	$ 400,000.00	$ 396,307.44
June 30, 2021	$    20,000.00	$                       21,796.91	$                       1,796.91	$     1,895.66	$ 400,000.00	$ 398,104.34
December 31, 2021	$    20,000.00	$                       21,895.74	$                       1,895.74	$           (0.08)	$ 400,000.00	$ 400,000.08
	$ 120,000.00	$                     129,991.08	$                       9,991.08			0

3.

Date		Debit	Credit
June 30, 2019	Cash	$    21,450.50
	Interest Revenue		$    21,450.50
	To record bond interest received
June 30, 2021	Cash	$    21,796.91
	Interest Revenue		$    21,796.91
	To record bond interest received