Question

On January 1, 2019, Kelly Corporation acquired bonds with a face value of $500,000 for $484,163.65, a price that yields a 11% effective annual interest rate. The bonds carry a 10% stated rate of interest, pay interest semiannually on June 30 and December 31, are due December 31, 2022, and are being held to maturity.

Required:

Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the:

1.	straight-line method of amortization
2.	effective interest method of amortization

1.

GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT Jan. 1 Investment in Held-to-Maturity Debt Securities 484,163.65 Cash 484,163.65 Jun. 30 Cash 27,500.00 Investment in Held-to-Maturity Debt Securities 1,979.54 Interest Income 29,479.54 Dec. 31 Cash 27,500.00 Investment in Held-to-Maturity Debt Securities 1,979.54 Interest Income 29,479.54

2.

Answer 1

	Rate	Semi annual Market Interest=(11/2)%	5.50%
	Nper	Number of Semi annual period	8	(4*2)
	Pmt	Semi annual Coupon Payment ($500000*10%)/2	$25,000
	FV	Payment at maturity	$500,000
	PV	Bond Issue Price	$484,163.65	(Using PV function of excel with Rate=4%, Nper=10, Pmt=-500, Fv=-10000)
	FV-PV	Bond Discount (500000-484164)	$15,836.35
		Semi-Annual Amortization of discount (Straight Line Method	$1,979.54	(15836.35/8)
			AMORTIZATION SCHEDULE(STRAIGHT LINE METHOD)
				(10/2)=5% *500000	Market rate(11/2)=5.5% *Previous Book value
			A	B	C=D+B	D	E	F	G=F-E
			Date	Cash Received	Interest Income	Amortization of Discount	Credit Balance in Bond Discount Account	Debit Balance in Debt SecurityAccount	Book value of the Bond
			Jan1,2019				$15,836.35	$500,000	$484,163.65
			June30,2019	$25,000	$26,979.54	$1,979.54	$13,856.81	$500,000	$486,143.19
			Dec31,2019	$25,000	$26,979.54	$1,979.54	$11,877.26	$500,000	$488,122.74
		JOURNAL ENTRY (STRAIGHT LINE METHOD)
	DATE	ACCOUNT TITLES	DEBIT	CREDIT
	Jan,1,2019	Held to Maturity Debt Security	$500,000
		Bond Discount		$15,836.35
		Cash		$484,163.65
	June,30,2019	Cash	$25,000.00
		Bond Discount	$1,979.54
		Interest Income		$26,979.54
	Dec,31,2019	Cash	$25,000.00
		Bond Discount	$1,979.54
		Interest Income		$26,979.54
			AMORTIZATION SCHEDULE(EFFECTIVE INTEREST)
				(10/2)=5% *500000	Market rate(11/2)=5.5% *Previous Book value
			A	B	C	D=C-B	E	F	G=F-E
			Date	Cash	Interest Income	Amortization of Discount	Credit Balance in Bond Discount Account	Debit Balance in Debt Security Account	Book value of the Bond
			Jan1,2019				$15,836.35	$500,000	$484,163.65
			June30,2019	$25,000	$26,629.00	$1,629.00	$14,207.35	$500,000	$485,792.65
			Dec31,2019	$25,000	$26,718.60	$1,718.60	$12,488.75	$500,000	$487,511.25
		JOURNAL ENTRY (EFFECTIVE INTEREST METHOD)
		ACCOUNT TITLES	DEBIT	CREDIT
	Jan,1,2019	Held to Maturity Debt Security	$500,000
		Bond Discount		$15,836.35
		Cash		$484,163.65
	June,30,2019	Cash	$25,000.00
		Bond Discount	$1,629.00
		Interest Income		$26,629.00
	Dec,31,2019	Cash	$25,000.00
		Bond Discount	$1,718.60
		Interest Income		$26,718.60