Brief Exercise 17-3 Carow Corporation purchased, as a held-to-maturity investmen

Question

Brief Exercise 17-3

Carow Corporation purchased, as a held-to-maturity investment, $74,800 of the 9%, 7-year bonds of Harrison, Inc. for $82,968, which provides a 7% return. The bonds pay interest semiannually.

Prepare Carow’s journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual interest and premium amortization. Assume effective-interest amortization is used. (Round answers to 0 decimal places, e.g. 2,500. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.

Account Titles and Explanation

Debit

Credit

(a)

(b)

No.

Account Titles and Explanation

Debit

Credit

(a)

(b)

Explanation / Answer

Working notes

1. Coupon interest = 74800 x 9% x 0.50 = 3366

Market rae interest = 82968 x 7% x 0.50 = 2904

Amortization = 3366-2904

= 462

No. Account Titles and Explanations Debit ($) Credit ($) (a) Investment in long-Term debt securities A/c Dr. 74800 Bond premium A/c Dr. 8168 To Cash A/c 82968 (b) For semi-annual interest Cash A/c Dr. 3366 To interest revenue A/c 3366 For amortization of premium Interest Revenue A/c Dr 462 To Bond premium A/c 462

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