Question

Please Journalize

The debt investment is held-to-maturity 5-year bond with an $86,000 face value and 10% stated interest rate. Interest is received on the first of each year. The bond was initially issued on 1/1/18. The bond was purchased for $79,800 and provides a 12% return. Prepare the necessary year-end entry to record interest revenue and discount amortization using the effective interest method.

Answer 1

Solution:

Bond Amortization Schedule
Period	Cash received	Interest revenue	Discount amortization	Carrying value
0				$79,800
1	$8,600	$9,576	$976	$80,776
2	$8,600	$9,693	$1,093	$81,869
3	$8,600	$9,824	$1,224	$83,093
4	$8,600	$9,971	$1,371	$84,465
5	$8,600	$10,136	$1,536	$86,000

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-18	Interest receivables Dr	$8,600.00
	Discount on bond investment Dr	$976.00
	To Interest revenue		$9,576.00
	(To record interest revenue and discount amortization)
31-Dec-19	Interest receivables Dr	$8,600.00
	Discount on bond investment Dr	$1,093.00
	To Interest revenue		$9,693.00
	(To record interest revenue and discount amortization)
31-Dec-20	Interest receivables Dr	$8,600.00
	Discount on bond investment Dr	$1,224.00
	To Interest revenue		$9,824.00
	(To record interest revenue and discount amortization)
31-Dec-21	Interest receivables Dr	$8,600.00
	Discount on bond investment Dr	$1,371.00
	To Interest revenue		$9,971.00
	(To record interest revenue and discount amortization)
31-Dec-22	Interest receivables Dr	$8,600.00
	Discount on bond investment Dr	$1,536.00
	To Interest revenue		$10,136.00
	(To record interest revenue and discount amortization)