Discount Amortization on Bond Investment and Partial Sale of Investment Using Effective Interest Method On January 1, 2019, Mark Corporation purchased bonds with a face value of $500,000 for $475,413.60. The bonds are due December 31, 2021, carry a 10% stated rate, and were purchased to yield 12%. Interest is payable semiannually on June 30 and December 31. On January 1, 2021, in contemplation of a major acquisition, one-fourth of the bonds were sold for $127,000. The remainder were held until maturity.
Required:
Prepare journal entries to record the purchase of the bonds, each interest payment, the partial sale of the investment on January 1, 2021, and the retirement of the bond issue on December 31, 2021.
Journalize the purchase of bonds, interest payment, partial sale of the investment on January 1, 2019, and the retirement of the bond issue on December 31, 2019.
On January 1, 2019, Corporation M purchased 10%, bond with a face value of $500,000 for $475,413.60. The bond carries 10% interest rate, and it will be paid semiannually on June 30 and December 31, until the maturity date of December 31, 2021. The effective interest rate is 12%.
During January 1, 2021, Corporation M sold one-fourth of the bonds for $127,000. Corporation M uses effective interest rate for amortization.
Prepare a schedule of bond investment interest income and discount amortization.
Corporation M | ||||
Bond investment interest income and Discount amortization Schedule (Partial) | ||||
Effective interest rate method | ||||
Date | Cash (Debit) (a) | Interest income (Credit) (b) | Investment in debt securities Debit (Credit) (c) | Carrying value of debt securities (d) |
January 1, 2019 | Â | Â | Â | $475,413.60 |
June 30, 2019 | $25,000.00 | $28,524.82 | $3,524.82 | $478,938.42 |
December 31, 2019 | $25,000.00 | $28,736.31 | $3,736.31 | $482,674.73 |
June 30, 2020 | $25,000.00 | $28,960.48 | $3,960.48 | $486,635.21 |
December 31, 2020 | $25,000.00 | $29,198.11 | $4,198.11 | $490,833.32 |
January 1, 2021 | $127,000.00 | $0.00 | -$122,708.33 | $368,124.99 |
June 30, 2021 | $18,750.00 | $22,087.50 | $3,337.50 | $371,462.49 |
December 31, 2021 | $393,750.00 | $22,287.51 | -$371,462.49 | $0.00 |
Table (1)
Note:
1.
(10% is bonds stated interest rate). On January 1, 2021 the one-fourth of the bond sold for $127,000. Thus increases the cash.
2.
3.
4.
Procedure to be followed to prepare journal entries:
Prepare journal entries in the books of Corporation M.
Record the purchase of held-to maturity debt securities.
Date | Account Title and Explanation | Debit | Credit |
January 1, 2019 | Investment in Held-to-Maturity Debt Securities | $475,413.60 | Â |
 |        Cash |  | $475,413.60 |
 | (To record the purchase of held-to-maturity securities at discount) |  |  |
Table (2)
Explanation:
Record the interest income earned on June 30, 2019 and December 31, 2019.
Date | Account Title and Explanation | Debit | Credit |
June 30, 2019 | Cash | $25,000.00 | Â |
 | Investment in Held-to-Maturity Debt Securities | $3,524.82 |  |
 |         Interest income |  | $28,524 |
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