Held-to-Maturity Securities and Amortization of a Discount On January 1, 2013, K
ID: 2421104 • Letter: H
Question
Held-to-Maturity Securities and Amortization of a Discount
On January 1, 2013, Kelly Corporation acquired bonds with a face value of $500,000 for $483,841.79, a price that yields a 10% effective annual interest rate. The bonds carry a 9% stated rate of interest, pay interest semiannually on June 30 and December 31, are due December 31, 2016, and are being held to maturity.
Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the straight-line method of amortization. If required, round your answers to the nearest cent. For compound entries, if an amount box does not require an entry, leave it blank.
Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the effective interest method of amortization. If required, round your answers to the nearest cent. For compound entries, if an amount box does not require an entry, leave it blank.
2013 investment in held-to-maturity debt securities $????? Jan 1 cash $????? June 30 cash $????? investment in held-to-maturity debt securities $????? interest income $????? Dec 31 cash $????? investment in held-to-maturity debt securities $????? interest income $?????Explanation / Answer
Straight-line method of amortization
Journal Entries:
Date
Accounts / Explanation
Debit
Credit
2013
Jan. 1
Investment in held-to-maturity debt securities
$ 483,841.79
Cash
$ 483,841.79
(Being bonds purchased)
June. 30
Cash (500000*9%/2)
$ 22,500.00
Investment in held-to-maturity debt securities
$ 2,019.78
Interest income
$ 24,519.78
(Being interest received and income recognized)
Dec. 31
Cash (500000*9%/2)
$ 22,500.00
Investment in held-to-maturity debt securities
$ 2,019.78
Interest income
$ 24,519.78
(Being interest received and income recognized)
Working Note:
Face value of Bonds
$ 500,000.00
Less: Issue Price
$ (483,841.79)
Discount on issue of Bonds
$ 16,158.21
Term of Bonds (Jan 1, 2013 to Dec. 31, 2016) =
4 years
Number of Semiannual = 4 years *2 =
8
Straight line Amortization = 16158.21/8 =
$ 2,019.78
Effective interest method of amortization
Journal Entries:
Date
Accounts / Explanation
Debit
Credit
2013
Jan. 1
Investment in held-to-maturity debt securities
$ 483,841.79
Cash
$ 483,841.79
(Being bonds purchased)
June. 30
Cash (500000*9%/2)
$ 22,500.00
Investment in held-to-maturity debt securities
$ 1,692.09
Interest income
$ 24,192.09
(Being interest received and income recognized)
Dec. 31
Cash (500000*9%/2)
$ 22,500.00
Investment in held-to-maturity debt securities
$ 1,776.69
Interest income
$ 24,276.69
(Being interest received and income recognized)
Working Note:
Issue Price of Bonds
$ 483,841.79
Effective annual interest rate
10%
Interest income as on June 30 = 483841.79*10%/2 =
$ 24,192.09
Semiannual Interest received on June 30 = 500000*9%/2 =
$ 22,500.00
Amortization amount till June 30 = 24192.09 -22500=
$ 1,692.09
Investment value on June 30 = 483841.79 + 1692.09 =
$ 485,533.88
Interest income as on Dec. 31 = 485533.88*10%/2 =
$ 24,276.69
Semiannual Interest received on Dec. 31 = 500000*9%/2 =
$ 22,500.00
Amortization amount till Dec. 31 = 24276.69 -22500=
$ 1,776.69
Straight-line method of amortization
Journal Entries:
Date
Accounts / Explanation
Debit
Credit
2013
Jan. 1
Investment in held-to-maturity debt securities
$ 483,841.79
Cash
$ 483,841.79
(Being bonds purchased)
June. 30
Cash (500000*9%/2)
$ 22,500.00
Investment in held-to-maturity debt securities
$ 2,019.78
Interest income
$ 24,519.78
(Being interest received and income recognized)
Dec. 31
Cash (500000*9%/2)
$ 22,500.00
Investment in held-to-maturity debt securities
$ 2,019.78
Interest income
$ 24,519.78
(Being interest received and income recognized)
Working Note:
Face value of Bonds
$ 500,000.00
Less: Issue Price
$ (483,841.79)
Discount on issue of Bonds
$ 16,158.21
Term of Bonds (Jan 1, 2013 to Dec. 31, 2016) =
4 years
Number of Semiannual = 4 years *2 =
8
Straight line Amortization = 16158.21/8 =
$ 2,019.78
Effective interest method of amortization
Journal Entries:
Date
Accounts / Explanation
Debit
Credit
2013
Jan. 1
Investment in held-to-maturity debt securities
$ 483,841.79
Cash
$ 483,841.79
(Being bonds purchased)
June. 30
Cash (500000*9%/2)
$ 22,500.00
Investment in held-to-maturity debt securities
$ 1,692.09
Interest income
$ 24,192.09
(Being interest received and income recognized)
Dec. 31
Cash (500000*9%/2)
$ 22,500.00
Investment in held-to-maturity debt securities
$ 1,776.69
Interest income
$ 24,276.69
(Being interest received and income recognized)
Working Note:
Issue Price of Bonds
$ 483,841.79
Effective annual interest rate
10%
Interest income as on June 30 = 483841.79*10%/2 =
$ 24,192.09
Semiannual Interest received on June 30 = 500000*9%/2 =
$ 22,500.00
Amortization amount till June 30 = 24192.09 -22500=
$ 1,692.09
Investment value on June 30 = 483841.79 + 1692.09 =
$ 485,533.88
Interest income as on Dec. 31 = 485533.88*10%/2 =
$ 24,276.69
Semiannual Interest received on Dec. 31 = 500000*9%/2 =
$ 22,500.00
Amortization amount till Dec. 31 = 24276.69 -22500=
$ 1,776.69
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