On January 1, 2014 Falcon Electro acquires $400,000 of 8% bonds at a price of $4

Question

On January 1, 2014 Falcon Electro acquires $400,000 of 8% bonds at a price of $442,376. The interest is payable each December 31, and the bonds mature December 31, 2034. The investment will provide Falcon Electro a 7% yield. The bonds are classified as held-to-maturity. Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the straight-line method. Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the effective-interest method. Prepare the journal entry for the interest receipt of December 31, 2015, and the discount amortization under the straight-line method. Prepare the journal entry for the interest receipt of December 31, 2015, and the discount amortization under the effective-interest method.

Explanation / Answer

Bond premium = 442376 -400000 = 42376

a)

Entry :(solution to part C)

Cash        Debit      32000

Premium on bond amortization   debit   2118.8

Interest revenue credit      34118.8

B)

Entry :

Cash        Debit      32000

Premium on bond amortization   debit   1106.04

Interest revenue credit      30893.96

A B= 400,000*.08 C= 42376/1 B+C D = 42376 -C 400000+ D Year BOnd outstanding at beginning Interest paid Bond premium amortizaion Interest revenue Balance in Bond premium Bond outstanding at end 1 442376 32000    [400000*.08] 2118.8 34118.8   [32000+2118.8] 42376-2118.8 = 40257.2 400000+40257.2 = 440257.2 2 440257.2 32000 2118.8 34118.8 40257.2-2118.8 = 38138.4 438138.4 3 438138.4 32000 2118.8 34118.8 36019.6 436019.6

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