On January 1, 2013, Kelly Corporation acquired bonds with a face value of $500,0

Question

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 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.

Explanation / Answer

Answer:

Date Account titles Debit Credit Jan 1, 2013 By Bond investment 500000 To Cash 483841.8 To Discount on bond 16158.21 June 30, 2013 By Cash 22500 ($500,000*9%/2) By Discount on bond 1692.09 (balancing figure) To Interest Income 24192.09 ($483,841.8*10%/2) December 31,2013 By Cash 22500 ($500,000*9%/2) By Discount on bond 1776.69 (balancing figure) To Interest Income 24276.69 {($483,841.8+$1692.09)*10%/2}

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