Question

On January 1, 2017, Hi and Lois Company purchased 12% bonds having a maturity value of \(300,000 for \)322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Hi and Lois Company uses the effective interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

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 at December 31, 2017.

(d) Prepare the journal entry to record the interestand the amortization at December 31, 2018.

Short answer

The debt investment Account was debited with $322,744.44, and the interest revenue account was credited with $32,274.44 and $31,901.89.

Step-by-step solution

Step 1

Held-to-Maturity securities are those securities that are kept held till the date of maturity.

Entry of bond purchase

Date	Description	Debit	Credit
January 1, 2017	Debt Investment	$322,744.44
	Cash		$322,744.44
	Being entry to record the purchase of bonds.

Bond amortization schedule

Date	Cash Received	Interest Revenue	Discounted Amortized	Carrying Amount of Bond
January 1, 2017				$322,744.44
January 1,2018	36,000	$32,274.44	$3,725.56	$319,018.88
January 1,2019	36,000	$31,901.89	$4098.11	$314,920.77
January 1,2020	36,000	$31,492.07	$4,507.93	$310,410.84
January 1,2021	36,000	$31,041.28	$4,958.72	$305,452.12
January 1,2022	36,000	$30,545.21	$5,454.79	$300,000

Entry of interest revenue

Date	Description	Debit	Credit
December 31, 2017	Cash	$36,000
	Held-to-maturity Securities		$3,725.56
	Interest Revenue		$32,274.44
	Being the entry for bond interest.

Entry of interest revenue

Date	Description	Debit	Credit
December 31, 2018	Cash	$36,000
	Held-to-maturity Securities		$4,098.11
	Interest Revenue		$31,901.89
	Being the entry for bond interest.