Question

On January 1, 2020, Headland Company purchased 9% bonds having a maturity value of $410,000, for $443,623.28. The bonds provide the bondholders with a 7% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Headland Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

(a) Prepare the journal entry at the date of the bond purchase. (Enter answers to 2 decimal places, e.g. 2,525.25. 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.)

(b)Prepare a bond amortization schedule. (Round answers to 2 decimal places, e.g. 2,525.25.)

Schedule of Interest Revenue and Bond Premium Amortization Effective-Interest Method Cash Received Interest Revenue Premium Amortized Carrying Amount of Bonds Date 1/1/20 $ 1/1/21 1/1/22 1/1/23 1/1/24 1/1/25

(c)Prepare the journal entry to record the interest revenue and the amortization at December 31, 2020. (Round answers to 2 decimal places, e.g. 2,525.25. 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.)

(d)Prepare the journal entry to record the interest revenue and the amortization at December 31, 2021. (Round answers to 2 decimal places, e.g. 2,525.25. 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.)

Answer 1

Solution a:

Journal Entries - Headland Company
Date	Particulars	Debit	Credit
1-Jan-20	Investment in bond Dr	$410,000.00
	Premium on bond investment Dr	$33,623.28
	To Cash		$443,623.28
	(To record investment in bond)

Solution b:

Schedule of Interest revenue and Bond Premium Amortization
Date	Cash Received	Interest revenue	Premium Amortized	Carrying amount of bonds
1-Jan-20				$443,623.28
1-Jan-21	$36,900.00	$31,053.63	$5,846.37	$437,776.91
1-Jan-22	$36,900.00	$30,644.38	$6,255.62	$431,521.29
1-Jan-23	$36,900.00	$30,206.49	$6,693.51	$424,827.78
1-Jan-24	$36,900.00	$29,737.94	$7,162.06	$417,665.73
1-Jan-25	$36,900.00	$29,234.27	$7,665.73	$410,000.00

Solution c:

Journal Entries - Headland Company
Date	Particulars	Debit	Credit
31-Dec-20	Interest receivables Dr	$36,900.00
	To Interest revenue		$31,053.63
	To Premium on bond investment		$5,846.37
	(To record interest revenue and premium amortization)

Solution d:

Journal Entries - Headland Company
Date	Particulars	Debit	Credit
31-Dec-21	Interest receivables Dr	$36,900.00
	To Interest revenue		$30,644.38
	To Premium on bond investment		$6,255.62
	(To record interest revenue and premium amortization)