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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
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Discount Amortization on Bonds Purchased between Interest Dates On October 1, 2019, Jenkins Corporation bought bonds with a face value of $200,000 for $199,175, which included accrued interest. The bonds are due December 31, 2021, and carry a face rate of interest of 10.5%. Interest on the bonds is payable semiannually on June 30 and December 31. Jenkins uses the straight-line method to amortize the discount.

Required:

  1. 1. Prepare journal entries to record the purchase of the bonds, each interest receipt, and the retirement of the issue on December 31, 2021.
  2. 2. Next Level If Jenkins failed to separately record the interest at acquisition, explain the errors that would occur in the company’s financial statements (no calculations are required).

1.

To determine

Record the journal entries in the books of Corporation J.

Explanation

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Bond discount: Bond discount is the amount by which the selling price (or issue price or market price) of the bond is lower than the face value of the bond.

Prepare the journal entry to record the purchase of bonds:

DateAccount Title and ExplanationDebit ($)Credit ($)
October 1, 2019Investment in Held-to-Maturity Debt Securities ($199,175$5,250)193,925 
 Interest income (1)5,250 
         Cash 199,175
 (To record the purchase of debt securities)  

Table (1)

Working note (1):

Calculate the amount of interest income:

Interest income = Face value of bond×Interest rate ×Number of months accrued12months=$200,000×0.105×312=$5,250

Prepare the journal entry to record the receipt of the interest for 2019:

DateAccount Title and Explanation Debit ($) Credit ($)
December 31, 2019Cash (2)10,500 
 Investment in Held-to-Maturity Debt Securities (3) ($225×3)675 
          Interest income 11,175
 (To record the interest and amortization)  

Table (2)

Working note (2):

Calculate the amount of cash received as interest.

Cash = Face value of bond×Statedinterest rate×6months12months=$200,000×0.105×612=$200,000×0

2.

To determine

Explain the errors that would occur in the company’s financial statements if Corporation J has failed to record the interest at acquisition.

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