Question

Strange Corporation purchased $60,400 of 6-year, 7% bonds of Kaecilius Inc. for $57,566 to yield an 8% return, and classified the purchase as an amortized cost method investment. The bonds pay interest semi-annually.

Required
Under ASPE and assuming the company has chosen the straight-line method of discount amortization - Prepare the following journal entries for Strange Corporation:

1) The purchase of the investment

2) Receipt of semi-annual interest and Discount amortization for the first interest payment that will be received

2) Receipt of semi-annual interest and Discount amortization for the second interest payment that will be received

Answer 1

--Working--

A	Face Value	$60,400
B	Cash paid for Investment	$57,566
C = A - B	Discount on Bonds Investment	$2,834
D	Term [years]	6
E = C/D	Annual Straight Line amortisation	$472.33
F = E/2	Semi annual Amortisation	$236.17

--Journal entries

Transaction	Accounts title	Debit	Credit
1	Investment in Bonds	$60,400.00
	Discount on Bonds Investment		$2,834.00
	Cash		$57,566.00
	(Purchase of investments)
2	Cash [60400 x 7% x 6/12]	$2,114.00
	Discount on Bonds Investment	$236.17
	Interest Revenue		$2,350.17
	(receipt of semi annual interest)
3	Cash [60400 x 7% x 6/12]	$2,114.00
	Discount on Bonds Investment	$236.17
	Interest Revenue		$2,350.17
	(receipt of semi annual interest)