On January 1, 2017, Carmody Corporation purchased 5% bonds with a face value of

Question

On January 1, 2017, Carmody Corporation purchased 5% bonds with a face value of $60,000 for $62,000. Carmody Corporation intends to hold the bonds until the maturity date. Interest is paid semiannually on January 1 and July 1. The company uses the straight -line amortization method for discounts and premiums. The journal entry on January 1, 2017 is: O A. O B. O C. O D. debit Investment in Bonds for $60,000, debit Premium on Bonds for $2,000 and credit Interest Revenue $62,000. debit Investment in Bonds for $62,000 and credit Interest Revenue for $62,000. debit Held-to - Maturity Investment in Bonds for $60,000, debit Premium on Bonds for $2,000 and credit Cash for $62,000. debit Held -to - Maturity Investment in Bonds for $62,000 and credit Cash for $62,000.

Explanation / Answer

D. debit Held-to-Maturity Investment in Bonds for $ 62,000 and credit Cash $ 62,000

When investment in bonds is made, it is recorded at cost.Periodically when interest is received then premium or discount is adjusted to make value of Bonds equal to its par value at the time of maturity.

So, at purchase date it is recorded at cost and journal entry is made as:

Account titles and explanation Debit Credit Held-to-Maturity Investment in Bonds $ 62,000 Cash $ 62,000

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