Question

In: Accounting

On January 1, 2012, Morgan Company acquires $300,000 of Nicklaus, Inc., 9% bonds at a price...

On January 1, 2012, Morgan Company acquires $300,000 of Nicklaus, Inc., 9% bonds at a price of $2... On January 1, 2012, Morgan Company acquires $300,000 of Nicklaus, Inc., 9% bonds at a price of $278,384. The interest is payable each December 31, and the bonds mature December 31, 2014. The investment will provide Morgan Company a 12% yield. The bonds are classified as held-to-maturity.

(a) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the straight-line method

(b) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the effective interest ethod

(c) Prepare the journal entry for the interest receipt of Dec 31,2013 and discount amrtization under staright line method

(d) Prepare the journal entry for the interest receipt of Dec 31,2013 and discount amrtization under effective interesmethod

Solutions

Expert Solution

Schedule of Interest Revenue and Bond Discount Amortization Straight-line Method 9% Bond Purchased to Yield 12%
Date Cash Received Interest Revenue Bond Discount Amortization Carrying Amount of bonds
01/01/2012                                           278,384
12/31/2012 (300000*9%)           27000                                  34,205                                                 7,205                                           285,589
12/31/2013 27000                                  34,205                                                 7,205                                           292,795
12/31/2014 27000                                  34,205                                                 7,206                                           300,000
(300000-278384)/3 = 7205
Schedule of Interest Revenue and Bond Discount Amortization Effective-Interest Method 9% Bond Purchased to Yield 12%
Date Cash Received Interest Revenue Bond Discount Amortization Carrying Amount of bonds
01/01/2012 -                                     278,384.00
12/31/2012 27000 33406.08** (33406-27000)               6406.08                                     284,790.08
12/31/2013 27000 34174.81 7174.81                                     291,964.89
12/31/2014 27000 35035.11 8035.11                                     300,000.00
* *$278,384 X .12 = $33,406.08
c
31-Dec-13 Cash 27000
Debt Investments (Held to maturity) 7205
Interest Revenue 34205
31-Dec-13 Cash 27000
Debt Investments (Held to maturity) 7174.81
Interest Revenue 34174.81

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