Question

Option #1: Investments in Debt Securities Complete the following questions. In addition to answering the items below, you must submit an analysis of the assignment. Analyze the specific outcomes and write an analysis directed toward the team at BAJA Corporation describing what the numbers mean and how they relate to the business. Submit journal entries in the Excel file included in the module section and written segments in an MS Word document. For written answers, please make sure your responses are well-written, formatted per CSU-Global Guide to Writing and APA2 and have proper citations, where applicable. On January 1, 2017, BAJA Corporation purchased bonds with a face value of $600,000 for $616,747.06 The bonds are due June 30.2020. carry a 13% stated interest rate, and were purchased to yield 12%. Interest is payable semiannually on June 30 and December 31. On March 31, 2018, in contemplation of a major acquisition, the company sold one-half the bonds for $319,000 including accrued interest; the remainder were held until maturity. 1. Prepare an investment interest income and bond premium amortization schedule using the effective interest method. 2. Prepare the journal entries to record the purchase of the bonds. 3. Prepare the journal entries to record each interest payment. 4. Prepare the journal entries to record the partial sale of the investment on March 31, 2018, and the retirement of the bond issue on June 30, 2020.

Journal Entries

Amortization Schedule Straight-Line

Amortization Effective Interest

Answer 1

Ans.

1.

Present Value of Bonds
Face Value	$600,000
Coupon Rate =13%/2	6.50%
Payment (PMT)	39000
Number of periods	7
Rate =12%/2	6.00%
Present Value of Bonds	$ 616,747.06
Premium on Bonds	$16,747.06

A	B	C	D	E	F	G
Period	Interest Payment = 6.50%  * face value	Interest Expenses = 6% * previous Book value	Amortization of Bonds Premium (C-B)	Credit Balance in bonds Premium Account	Credit Balance in Bonds Payable	Book Value of Bonds (F+ E)
1-Jan-17				$16,747.06	$600,000.00	$616,747.06
30-Jun-17	$      39,000.00	$         37,004.82	$   (1,995.18)	$14,751.88	$600,000.00	$614,751.88
31-Dec-17	$      39,000.00	$         36,885.11	$   (2,114.89)	$12,637.00	$600,000.00	$612,637.00
30-Jun-18	$      39,000.00	$         36,758.22	$   (2,241.78)	$10,395.22	$600,000.00	$610,395.22
31-Dec-18	$      39,000.00	$         36,623.71	$   (2,376.29)	$  8,018.93	$600,000.00	$608,018.93
30-Jun-19	$      39,000.00	$         36,481.14	$   (2,518.86)	$  5,500.07	$600,000.00	$605,500.07
31-Dec-19	$      39,000.00	$         36,330.00	$   (2,670.00)	$  2,830.07	$600,000.00	$602,830.07
30-Jun-20	$      39,000.00	$         36,169.80	$   (2,830.20)	$  (0.13)	$600,000.00	$599,999.87

2.

Entry to record Purchase of Bonds.

Date	Account Titles and Explanation	Debit	Credit
1-Jan-17	Investment In Bonds	$       600,000.00
	Premium on Bonds Payable	$         16,747.06
	Cash		$ 616,747.06

3.

Entry to record interest payments

Date	Account Titles and Explanation	Debit	Credit
30-Jun-17	Cash	$         39,000.00
	Premium on Bonds Payable		$     1,995.18
	Interest Revenue		$   37,004.82
	[Being interest income recognized]
31-Dec-17	Cash	$         39,000.00
	Premium on Bonds Payable		$     2,114.89
	Interest Revenue		$   36,885.11
	[Being interest income recognized]

4.

Entries to record the partial sale of the investment on March 31, 2018, and the retirement of the bond issue on June 30, 2020.

Date	Account Titles and Explanation	Debit	Credit
31-Mar-18	Interest Receivables	$         19,500.00
	Premium on Bonds Payable		$     1,120.89
	Interest Revenue		$   18,379.11
	[Being interest receivable for 3 months is recorded]
31-Mar-18	Cash (319000+ 19500)	$       338,500.00
	Interest Receivables		$   19,500.00
	Premium on Bonds Payable(1120.89/2 + 10395.22/2)		$     5,758.05
	Investment in bonds (600000/2)		$300,000.00
	Gain on sale		$   13,241.95
	[Being the partial sale of Bond and Gain on sale is recorded]
30-Jun-18	Cash	$         19,500.00
	Premium on Bonds Payable		$     1,120.89
	Interest Revenue		$   18,379.11
	[Being interest income recognized]
31-Dec-18	Cash	$         19,500.00
	Premium on Bonds Payable		$     1,188.14
	Interest Revenue		$   18,311.86
	[Being interest income recognized]
30-Jun-19	Cash	$         19,500.00
	Premium on Bonds Payable		$     1,259.43
	Interest Revenue		$   18,240.57
	[Being interest income recognized]
31-Dec-19	Cash	$         19,500.00
	Premium on Bonds Payable		$     1,335.00
	Interest Revenue		$   18,165.00
	[Being interest income recognized]
30-Jun-20	Cash	$         19,500.00
	Premium on Bonds Payable		$     1,415.10
	Interest Revenue		$   18,084.90
	[Being interest income recognized]
30-Jun-20	Cash	$       300,000.00
	Investments in Bonds		$300,000.00
	[Being the retirement of Bonds recorded]