Question

Troomp Corporation acquired $7,200,000 par value, 14%, five-year bonds on their date of issue, January 1 of the current year. The market rate at the time of issue was 18% and interest is paid semiannually on June 30 and December 31 Troomp will use the effective interest rate method to account for this investment. Troomp intends to hold the investment until the bonds mature. Read the requirements. Requirements 1 Determine the purchase price of the investment in bonds. Prepare the journal entry to record the acquisition of the bond investment. Prepare an amortization table for the investment using the effective interest rate method Prepare the journal entry to record the interest income for the first year. Prepare the journal entry to record the sale of the bonds at the end of the third year for $6,620,000. a. b. c. d. e.

Please help A-E

Answer 1

Part -(a)	Purchase price of the Bonds
	Year	Cash flows	Present value @ 9% (18%/2)	Present value
	1	504,000	0.9174312	462,385
	2	504,000	0.8416800	424,207
	3	504,000	0.7721835	389,180
	4	504,000	0.7084252	357,046
	5	504,000	0.6499314	327,565
	6	504,000	0.5962673	300,519
	7	504,000	0.5470342	275,705
	8	504,000	0.5018663	252,941
	9	504,000	0.4604278	232,056
	10	504,000	0.4224108	212,895
	10	7,200,000	0.4224108	3,041,358
	Purchase price of the Bonds			6,275,857
	Premium on Bonds = (7,200,000-6,275,857) = 924,143
Part - (b)	Journal entry on acquisition of Bonds
	1/1	Investment in Bonds		7,200,000
			Cash		6,275,857
			Premium on Investment in Bonds		924,143
		(Bond acquired)
Part - (c)	Amortization table
	Date	Cash	Income	Amortization	Carrying amount
		(7,200,000*7%)	(Carrying amount * 9%)	(Expense-Cash)
	1/1				6,275,857
	6/30	504,000	564,827.16	60,827	6,336,684
	12/31	504,000	570,301.60	66,302	6,402,986
	6/30	504,000	576,268.74	72,269	6,475,255
	12/31	504,000	582,772.93	78,773	6,554,028
	6/30	504,000	589,862.50	85,862	6,639,890
	12/31	504,000	597,590.12	93,590	6,733,480
	6/30	504,000	606,013.23	102,013	6,835,494
	12/31	504,000	615,194.42	111,194	6,946,688
	6/30	504,000	625,201.92	121,202	7,067,890
	12/31	504,000	636,110.09	132,110	7,200,000
Part - (d)	Journal entry of interest income for 1st year
	6/30	Cash		504,000
		Premium on Bonds payable		60,827
			Interest received		564,827
		(Interest received and premium amortized)
	12/31	Cash		504,000
		Premium on Bonds payable		66,302
			Interest received		570,302
		(Interest received and premium amortized)
Part - (e)		Cash		6,620,000
		Loss on Investment in Bonds		113,480
			Investment in Bonds		6,733,480
		(Bond sold)