Held-to-Maturity Securities and Amortization of a Discount On January 1, 2019, Kelly Corporation acquired bonds with a face value of $500,000 for $483,841.79, a price that yields a 10% effective annual interest rate. The bonds carry a 9% stated rate of interest, pay interest semiannually on June 30 and December 31, are due December 31, 2022, and are being held to maturity

Required:

Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the:

1. 1. straight-line method of amortization
2. 2. effective interest method of amortization

Record the journal entries for the purchase of bonds and the first two interest receipts using the following methods:

(1) Straight-line method of amortization

(2) Effective interest method of amortization

Straight-line bond amortization:

The method of bond amortization by distributing the bond discount amount over the interest period equally is known as straight-line amortization of bond.

Effective interest amortization method: The amortization method which applies the market rate of interest to calculate the interest and the amortization of bond discount or premium for a particular period of time is known as effective interest amortization model.

(1)

Record the journal entries for the purchase of bonds and the first two interest receipts using the straight-line method of amortization:

To record the purchase of the bonds:

Table (1)

• Investment in Held-to-Maturity Debt Securities is an asset account and it is increased. Thus, debit investment in held-to-maturity debt securities with $483,841.79.
• Cash is an asset account and it is decreased. Thus, credit cash with $483,841.79.

To record the interest receipts:

Table (2)

• Investment in Held-to-Maturity Debt Securities is an asset account and it is increased. Thus, debit investment in held-to-maturity debt securities with $2,019.78.
• Cash is an asset account and it is increased. Thus, debit cash with $22,500.00.
• Interest income is revenue and it increases the value of shareholders’ equity. Thus, credit interest income with $24,519.78.

Working note (1):

Calculate the amount of cash:

Cash=Face value×Interest rate×6 months12 months=$500,000×0.09×6 months12 months=$22,500.00

Working note (2):

Calculate the amount of investment in held-to-maturity debt securities:

Investment in held-to-maturity debt securities=(Face value−Purchase price)8 semi annual periods=($500,000.00−$483,841.79)8=$2,019.78

To record the interest receipts:

Table (3)

• Investment in Held-to-Maturity Debt Securities is an asset account and it is increased. Thus, debit investment in held-to-maturity debt securities with $2,019.78.
• Cash is an asset account and it is increased. Thus, debit cash with $22,500.00.
• Interest income is revenue and it increases the value of shareholders’ equity. Thus, credit interest income with $24,519.78.

(2)

Record the journal entries for the purchase of bonds and the first two interest receipts using the effective interest method of amortization:

To record the purchase of the bonds:

Table (4)

• Investment in Held-to-Maturity Debt Securities is an asset account and it is increased. Thus, debit investment in held-to-maturity debt securities with $483,841