Question

On January 1, 2020, National Retail purchased $100,000 of GEH Company bonds at a discount of $10,000. The GEH bonds pay 6% interest but were purchased when the market interest rate was 8% for bonds of similar risk and maturity. The bonds pay interest semiannually on June 30 and December 31 of each year. National Retail accounts for the bonds as a held-to-maturity investment and uses the effective interest method. In National Retail’s December 31, 2020, journal entry to record the second period of interest would include a credit to interest revenue of:

Answer 1

Answer:

Cr Interest revenue $3,624

Explanation:

Dr Investment in bonds 100,000

    Cr Cash 90,000

    Cr Discount on investment in bonds 10,000

the first coupon payment:

(90,000 x 4%) - $3,000 = $600

Dr Cash 3,000

Dr Discount on investment in bonds 600

    Cr Interest revenue 3,600

the second coupon payment:

(90,600 x 4%) - $3,000 = $624

Dr Cash 3,000

Dr Discount on investment in bonds 624

    Cr Interest revenue 3,624