Question
investments
PART A AND C ONLY
Video E9.3 (LO 2) (Entries for Cost/Amortized Cost Investments) On January 1, 2020, Mustafa Lim ited paid $537,907.40 for 12%
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Answer #1

a.

Date General Journal Debit Credit
$ $
Jan 1, 2020 Bonds Receivable 500,000
Premium on Bonds Receivable 37,907.40
Cash 537,907.40

b. Bond Amortization Schedule:

Date Amount Received Interest Revenue Bond Premium Amortized Carrying Value of Bonds Receivable
Jan 1, 2020 $ 537,907.40
Dec 31, 2020 $ 60,000 $ 53,790.74 $ 6,209.26 531,698.14
Dec 31, 2021 60,000 53,169.81 6,830.19 524,867.95
Dec 31, 2022 60,000 52,486.80 7,513.20 517,354.75
Dec 31, 2023 60,000 51,735.48 8,264.52 509,090.23
Dec 31, 2024 60,000 50,909.77 9,090.23 500,000
$ 262,092.60

c.

Date General Journal Debit Credit
$ $
Dec 31, 2020 Cash 60,000
Premium on Bonds Receivable 6,209.26
Interest Revenue 53,790.74

d.

Date General Journal Debit Credit
$ $
Dec 31, 2021 Cash 60,000
Premium on Bonds Receivable 6,830.19
Interest Revenue 53,169.81

e.

Date General Journal Debit Credit
$ $
Jan 1, 2025 Cash 500,000
Bonds Receivable 500,000

f.

Date General Journal Debit Credit
$ $
December 31 Cash 60,000
Premium on Bonds Receivable 7,581.48
Interest Revenue 52,418.52

g. Total interest income under the effective interest method = $ 262,092.60

Total interest income under the straight-line method = $ 262,092.60

h. The effective interest rate reflects the current market interest rate. Hence it is more relevant to the user of the financial statements.

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