Question

On May 1, 2018 ABC Corporation purchased $1,500,000 of 12% bonds, interest payable on january 1 and july 1, for $1,406,500 plus accrued interest. The bonds mature on January 1,2024. Amortization is recorded when interest is received by the straight-line method (by months and round to the nearest dollar). (Assume bonds are available for sale)
Instructions

(a)Prepare the entry for May 1, 2018
(b) Complete the Interest Revenue Received and Bond Amortization Schedule.
(c) The bonds are sold on November 1,2019 for $1,412,500 plus accrued interest.
prepare all entries required to properly record the sale.

Answer 1

Solution:

1. Entry for May 1, 2018:

Date Account Titles and Explanation       Debit                     Credit  

1-May-18 Available-for-Sale Securities $1,406,500  

Interest Revenue                                 $60,000  

Cash                                                               $1,466,500  

(To record purchase of 12% bonds)  

Available-for-Sale Securities               $1,375  

Interest Revenue                                                            $1,375  

(To record inerest expense)  

Cash                                              $15,000  

Interest Revenue                                                            $15,000  

(To record interest expense on date of sale - August 1, 2018) )    

Cash                                               $1,412,500  

Available for sale- securities                                     $1,406,500  

Gain on sale of securities                                        $6,000  

Calculations are as follows:

Amortization = $1,500,000 - $1,406,500 = $93,500

The bond period is for 5 years 8 months = 68 months

Hence monthly interest revenue = $93.500 divide by 68 = $$1,375

Interest revenue = 1,500,000 multiply 12% multiply 1/12 = &18.000