Question

Carow Corporation purchased on January 1, 2017, as a held-to-maturity investment, \(60,000 of the 8%, 5-year bonds of Harrison, Inc. for \)65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow’s journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual interest and premium amortization. Assume effective-interest amortization is used

Short answer

1. The amount debited to debt investment is $65,118.
2. The amount of premium amortization is $446.

Step-by-step solution

Definition of discount amortization

Discount amortization is the process of reducing the cost of the bond in each period to show the reality of the bond.

Journal entry of the purchase of the investment

Date	Description	Debit	Credit
January 1, 2017	Debt Investment	$65,118
	Cash		$65,118
	Being entry to record the purchase of bonds

Journal entry for the receipt of annual interest and discount amortization

Date	Description	Debit	Credit
June 30, 2017	Cash	$2,400
	Debt Investment		$446
	Interest Revenue		$1,954
	Being the entry for bond interest and amortization of the discount

Note:

$$\begin{gathered} \mathbf{\text{Amortizationamount}}\mathbf{=}\mathbf{\text{Expectedreturn}}\mathbf{-}\mathbf{\text{Actualreturn}} \\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{400}\mathbf{-}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{954} \\ \mathbf{=}\mathbf{\$}\mathbf{446} \end{gathered}$$