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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem

On January 1, 2019, Gatrong Corporation purchased 12%, 5-year Fleming Corporation bonds will a face value of $200,000. It expects to hold these bonds until maturity. The bonds pay interest semiannually on June 30 and December 31. Gatrong paid $215,443, a price that yields a 10% effective annual interest rate. Prepare the journal entry of Gatrong to record the purchase of the bonds.

Refer to the information in RE 13-1. Prepare the journal entry on June 30 for Gatrong to record the first interest receipt, using the effective interest method. Round to the nearest dollar.

To determine

Record the journal entry for the first interest payment under the effective interest method in the books of Corporation G on June 30.

Explanation

Effective interest method:

When amortization value is equal to difference between the interest income amount and the cash receipt it is termed as the effective interest method.

Record the journal entry for the first interest payment under the effective interest method in the books of Corporation G on June 30.

DateAccount title and explanationDebit ($)Credit ($)
June 30Cash (1)12,000 
 Investment in held-to-maturity debt securities 1,228
 Interest income (2) 10,772
 (To record the receipt of first interest)  

Table (1)

Working note (1):

Calculate the amount of cash:

Cash=Face value×Interest rate×Time=$200,000×0

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