Hello, My problem is Company acquires $300,000 of Nicklaus, Inc., 9% bonds at a

Question

Hello,

My problem is

Company acquires $300,000 of Nicklaus, Inc., 9% bonds at a price of $278,384. The interest is payable each December 31, and the bonds mature December 31, 2012. The investment will provide Morgan Company a 12% yield. The bonds are classified as held-to-maturity.

Instructions:

A. Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the straight-line method. (Round to the nearest dollar)

B. Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the effective-interest method. (Round to the nearest dollar)

C. Prepare the journal entry for the interest receipt of December 31, 2011, and the discount amortization under the straight-line method.

D. Prepare the journal entry for the interest receipt of December 31, 2011, and the discount amortization under the effective-interest method.

Thanks,

Latonya

Explanation / Answer

Year 1- 3 (Straight Line Method) DR Cash 27,000 (300,000* .09) DR Bond Discount Amortization 7205 (7206 in year 3) [(300,000-278,384)/3] CR Interest Revenue 34,205 (34,206 in year 3) Year 1 Effective Interest Method DR Cash 27,000 DR Bond Discount Amortization 6,406 (33,406-27,000) CR Interest Revenue 33,406 (278,384 *.12) Year 2 DR Cash 27,000 DR Bond Discount Amortization 7,175 CR Interest Revenue 34,175 [(278,384+6406)* .12) Year 3 DR Cash 27,000 DR Bond Discount Amortization 8,035 CR Interest Revenue 35,035 [(278,384+6,406+7,175)*.12]

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