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16 August, 09:18

On January 1, Year 1, Purl Corp. purchased as a long-term investment $500,000 face amount of Shaw, Inc.'s 8% bonds for $456,200. The bonds were purchased to yield 10% interest. The bonds mature on January 1, Year 6, and pay interest annually on January 1. Purl uses the effective interest method of amortization. What amount (rounded to nearest $100) should Purl report on its December 31, Year 2, balance sheet for these held-to-maturity bonds?

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  1. 16 August, 12:02
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    Investment in bonds $468,000

    Explanation:

    In this case, the journal entry to record the purchase of the bonds should be:

    January 1, Year 1, bonds purchased as long term investment

    Dr Investment in bonds 456,200

    Cr Cash 456,200

    In the balance sheet it would be reported as an asset: Investment in bonds $456,200

    amortization of bond discount for first coupon = ($456,200 x 10%) - ($500,000 x 8%) = $45,620 - $40,000 = $5,620

    journal entry to record first coupon payment:

    January 1, Year 2, first coupon payment collected

    Dr Cash 40,000

    Dr Investment in bonds 5,620

    Cr Interest revenue 45,620

    So the investment in bonds account now has a $461,820 balance

    amortization of bond discount for second coupon = ($461,820 x 10%) - ($500,000 x 8%) = $46,182 - $40,000 = $6,182

    journal entry to record second coupon payment:

    January 1, Year 3, second coupon payment collected

    Dr Cash 40,000

    Dr Investment in bonds 6,182

    Cr Interest revenue 46,182

    So the investment in bonds account now has a $468,002 balance

    Since we are told to report the December 31, Year 2, balance, the accrued interest journal entry should be:

    Dr Interest receivable 40,000

    Dr Investment in bonds 6,182

    Cr Interest revenue 46,182

    The account balance is the same though, $468,002 rounded down to $468,000
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