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On December 31, 2015, ABC Company issued $170,000 par of a 7% interest rate and a...

On December 31, 2015, ABC Company issued $170,000 par of a 7% interest rate and a 4% yield for $192,705, which were purchased by DEF Company. Interest is received yearly on December 31. The effective interest method is used for any premium or discount to be amortized by the investor. Presented below is an amortization schedule prepard by DEF Company related to this debt investment in ABC Company’s bonds.

Date

Cash Received

Interest Revenue

Bond Premium

Amortization

Carrying Amount

of Bonds

12/31/15

1

12/31/16

11,900

$7,708

$4,192

188,513

12/31/17

2

3

4

5

12/31/18

11,900

7,366

4,534

179,620

12/31/19

11,900

7,185

4,715

174,905

12/31/20

11,900

6,995

4,905

170,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/2016

12/31/2017    

12/31/2018        

12/31/2019       

12/31/2020

Amortized cost

                     $188,513

$184,154                 

$179,620    

$174,905  

170,000

Fair value

$187,900

186,300

$181,400

$176,000

$170,000

(a) Use the effective-interest method for discount or premium amortization to determine the

missing amount in the bond amortization schedule above: (1),  (2),  (3), (4), and  (5).

1, Carrying amount of bonds at beginning=Issue price of the bond=$ 192705

2,   Cash received=$ 11900

3, Interest revenue=Previous carrying amount*Yield=188513*4%=7540.52=$ 7541

4, Bond premium amortization=Cash received-Interest revenue=11900-7541=$ 4359

# 5 , ?

(e) Prepare the journal entry to record the purchase of these bonds on 12/31/15 and all of the relevant journal entries related this debt investments for 2016, assuming the bonds are classified as Held-to-Maturity Securities. ?

(f) Prepare the journal entry to record the purchase of these bonds on 12/31/15 and all of the relevant journal entries related this debt investments for 2016, assuming the bonds are classified as Available-for-Sale Securities. ?

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Answer #1

Answer-a(5):

= $188513 - 4359 = $184,154

Answer-(e):

Credit Journal Entry assuming Held-to-maturity bonds: Date Account Name 12/31/2015 Debt investment Cash Debit 192,705 $ 192,7

Answer-(f):

Debit Credit Journal Entry assuming available-for-sale securities: Date Account Name 12/31/2015 Debt investment Cash 192,705

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