Question

On March 31, 2019, Brodie Corporation acquired bonds with a par value of $600,000 for $628,800. The bonds are due December 31, 2024, carry a 10% annual interest rate, pay interest on June 30 and December 31, and are being held to maturity. The accrued interest is included in the acquisition price of the bonds. Brodie uses straight-line amortization. Required: 1. Prepare journal entries for Brodie to record the purchase of the bonds and the first two interest receipts. 2. Next Level If Brodie failed to separately record the interest at acquisition, explain the errors that would occur in the company’s financial statements (no calculations are required).

1. Prepare journal entries for Brodie to record the purchase of the bonds on March 31 and the first two interest receipts on June 30 and December 31.

General Journal Instructions

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PAGE 1

GENERAL JOURNAL

Score: 99/112

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1	✔march 31	✔Investment in held-to-maturity debt securities		✔613,800
2		✔Interest income		✔15000
3		✔cash			✔628,800
4	✔June 30	✔Cash		✔30,000
5		✔Investment in held-to-maturity debt securities		?
6		✔Interest income			?
7	Dec 31	✔Cash		✔30000
8		✔Investment in held-to-maturity debt securities		?
9		✔Interest Income			?

Please show your work because I am genuinely trying to understand what I am missing. Thank you!

Answer 1

It is given that Brodie Corporation acquired bonds with a par value of $600,000 for $628,800 on March 31, 2019 and it is due by December 31, 2024. It means that the bond has 5 years (=10 semiannuals) to maturity. When straight-line amortization is used, difference between bond's acquisition price and value of investment recorded shall be amortized equally in 10 installments. However, it is given that the accrued interest is included in the acquisition price of the bonds. As the bonds were acquired on Mar. 31, 2019 and last interest paid on bonds was Dec. 31, 2018, there would be 3 months' interest accrued and included in the acquisition price. $600,000 5% (10% / 2] Face value of the bonds acquired Semiannual interest rate Number of months' interest accrued Amount of interest included in acquisition price Acquisition price paid for the bonds Value of Investment in held-to-maturity debt securities $15,000 [$600000 x 5% x (3/6)] $628,800 $613,800 ($628800 - $15000] $15,000 (As calculated above] Amount of interest included in acquisition price Number of semiannuals to maturity Semiannual straight-line amortization 10 $1,500 ($15000 / 10]

Credit Date Mar. 31 Debit $613,800 $15,000 Jun. 30 Account Titles & Explanation Investments in held-to-maturity debt securities Interest income Cash Cash Investments in held-to-maturity debt securities Interest income Cash Investments in held-to-maturity debt securities Interest income $30,000 $750 $628,800 ($600000 x 5%] ($1500 x (3/6)] $30,750 [$30000 + $750] [$600000 x 5%] [As calculated above] $31,500 ($30000 + $1500] Dec. 31 $30,000 $1,500 NOTE: For Jun. 30, only 3 months' amortization is needed and so $1500/2 = $750 is amortized. 2) If Brodie failed to separately record the interest at acquisition, value of Investments in held-to-maturity debt securities would be overstated at the acquisition date. Subsequently, interest income in each year's income statement will be understated because no amortization will be recorded as Brodie failed to separately record the interest at acquisition.