On January 1, 2014, Hmart Company purchased 5% bonds, having a maturity value of

Question

On January 1, 2014, Hmart Company purchased 5% bonds, having a maturity value of $500,000, for $428,938. The bonds provide the bondholders with a 7% yield. They are dated January 1, 2014, and mature January 1, 2024, with interest receivable June 30 and December 31 of each year. H-mart Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

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

(b) Prepare the first 3 years of a bond amortization schedule.

(c) Prepare the journal entries to record the interest received and the amortization for 2014.

Explanation / Answer

Answer a. Journal Entry Date Particulars Dr Amount Cr Amount Jan.01 Long Term Investments                           Dr. 428938 2014 To Cash 428938 (Purchase of 5% Bonds) Answer b. Bond Premium Amortization Table Date Interest Recd Interest Income Diffrence Bond Carrying Value ($500000 X 5% X 6/12) A B C = A-B Jan.1, 2014                 428,938 June 31, 2014               12,500            15,013              2,513                 431,451 Dec 31, 2014               12,500            15,101              2,601                 434,052 June 31, 2015               12,500            15,192              2,692                 436,743 Dec 31, 2015               12,500            15,286              2,786                 439,529 June 31, 2016               12,500            15,384              2,884                 442,413 Dec 31, 2016               12,500            15,484              2,984                 445,397 June 31, 2017               12,500            15,589              3,089                 448,486 Dec 31, 2017               12,500            15,697              3,197                 451,683 June 31, 2018               12,500            15,809              3,309                 454,992 Dec 31, 2018               12,500            15,925              3,425                 458,417 June 31, 2019               12,500            16,045              3,545                 461,962 Dec 31, 2019               12,500            16,169              3,669                 465,630 June 31, 2020               12,500            16,297              3,797                 469,427 Dec 31, 2020               12,500            16,430              3,930                 473,357 June 31, 2021               12,500            16,568              4,068                 477,425 Dec 31, 2021               12,500            16,710              4,210                 481,635 June 31, 2022               12,500            16,857              4,357                 485,992 Dec 31, 2022               12,500            17,010              4,510                 490,502 June 31, 2023               12,500            17,168              4,668                 495,169 Dec 31, 2023               12,500            17,331              4,831                 500,000             250,000         321,062            71,062 Answer c. Journal Entry Date Particulars Dr Amount Cr Amount June.31 Cash                                                                  Dr. 12500 2014 Long term Investment                              Dr. 2513    To Interest Recd 15013 (interest recd on Bonds) Dec.31 Cash                                                                  Dr. 12500 2014 Long term Investment                              Dr. 2601    To Interest Recd 15101 (interest recd on Bonds)

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