Question

On January 1, 2020, Crane Company purchased 12% bonds having a maturity value of $430,000, for $462,600.36. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Crane Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.
1. Prepare the journal entry at the date of the bond purchase.
2. Prepare a bond amortization schedule.

Answer 1

Answer and Explanation:

1. The journal entry is given below;

On Jan 1, 2020

Investment in bond Dr $430,000.00  

Premium on bond investment Dr $32,600.36  

        To Cash  $462,600.36

(being the investment in bond is recorded)

2. The preparation of the bond amortization schedule is presented below;

Date      Cash          Interest         Premium         Carrying amount of

            Received     revenue Amortized bonds

1-Jan-20                                                                   $462,600.36

1-Jan-21 $51,600.00    $46,260.04   $5,339.96   $457,260.40

  (12% of $430,000)

1-Jan-22 $51,600.00   $45,726.04    $5,873.96   $451,386.44

1-Jan-23  $51,600.00   $45,138.64    $6,461.36   $444,925.08

1-Jan-24 $51,600.00   $44,492.51    $7,107.49     $437,817.59

1-Jan-25   $51,600.00   $43,782.41   $7,817.59      $430,000.00