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

Solution 1:

Date	Particulars	Debit	Credit
01-Jan-19	Investment in Bond Dr	$4,00,000
	To Discount on Bond		$9,991
	To Cash		$3,90,009
	(Being bond purchased)

Solution 2:

Date	Cash Received	Interest Revenue	Discount amortized	Bond carrying amount
01-Jan-19				$3,90,009
30-Jun-19	$20,000	$21,450	$1,450	$3,91,459
31-Dec-19	$20,000	$21,530	$1,530	$3,92,990
30-Jun-20	$20,000	$21,614	$1,614	$3,94,604
31-Dec-20	$20,000	$21,703	$1,703	$3,96,307
30-Jun-21	$20,000	$21,797	$1,797	$3,98,104
31-Dec-21	$20,000	$21,896	$1,896	$4,00,000

Solution 3:

Date	Particulars	Debit	Credit
30-Jun-19	Cash Dr	$20,000
	Discount on bond Dr	$1,450
	To Interest Revenue		$21,450
	(To record Interest revenue and Amortization of discount)

Date	Particulars	Debit	Credit
30-Jun-21	Cash Dr	$20,000
	Discount on bond Dr	$1,797
	To Interest Revenue		$21,797
	(To record Interest revenue and Amortization of discount)