Question

On January 1, 2017, Roosevelt Company purchased 12% bonds, having a maturity value of \(500,000, for \)537,907.40.

The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest

received January 1 of each year. Roosevelt’s business model is to hold these bonds to collect contractual cash flows.

Instructions

(a) Prepare the journal entry at the date of the bond purchase.

(b) Prepare a bond amortization schedule.

(c) Prepare the journal entry to record the interest revenue and the amortization for 2017.

(d) Prepare the journal entry to record the interest revenue and the amortization for 2018

Short answer

Debt investment debited by $537,907.40 and cash credit by $537,907.40. Interest revenue for the year 2018 is $53,169.81.

Step-by-step solution

Entry for purchase of binds.

Date	Particulars	Debit	Credit
	Debt Investment	$537,907.40
	Cash		$537,907.40
	(Being entry for the purchase of debt investment)

Bond amortisation schedule

Date	Cash Revenue	Interest Received	Premium of bond amortisation	Carrying amount
1/1/2017				$537,907.40
1/1/2018	$60,000	$53,790.74	$6,209.26	$531,698.14
1/1/2019	$60,000	$53,169.81	$6,830.19	$524,867.95
1/1/2020	$60,000	$52,486.79	$7,513.21	$$517,354.74
1/1/2021	$60,000	$51,735.47	$8,264.53	$509,090.21
1/1/2022	$60,000	$50,909.02	$9,090.98	$500,000
Total	$300,000	$262,091.76	$37,907.40

Entry for interest revenue

Date	Particulars	Debit	Credit
	Cash	$60,000
	Debt Investment		$6,209.26
	Interest Revenue		$53,790.74
	(Being entry for the interest revenue and premium on bond amortisation)

Entry for interest revenue

Date	Particulars	Debit	Credit
	Cash	$60,000
	Debt Investment		$6,830.19
	Interest Revenue		$53,169.81
	(Being entry for the interest revenue and premium on bond amortisation)