Question

The following schedule of premium amortization on a bond investment has been provided to you. Issue date is 1/1/2013, and maturity date is 12/31/17. Interest is received on Dec 31 of each year.

Effective-Interest Method of amortization

12% (stated rate) Bonds purchased to Yield 10%

Face value of the bond investment = $300,000

Date

Cash Interest Received

Interest Revenue recorded

Premium Amortized

Unamortized Premium

Carrying

Value of Investment

1/1/13

$22,744.44

$322,744.44

12/31/13

$36,000

$32,274.44

$3,725.56

$19,018.88

319,018.88

12/31/14

36,000

31,901.89

4,098.11

$14,920.77

314,920.77

12/31/15

36,000

31,492.08

4,507.92

$10,412.85

310,412.85

12/31/16

36,000

31,041.29

4,958.71

$5,454.14

305,454.14

12/31/17

36,000

30,545.86

5,454.14

0

300,000.00

The securities are classified as available-for-sale. The fair value of the bonds at December 31 of each year-end is as follows:

2013

$320,500

2014

$309,000

2015

$308,000

2016

$310,000

2017

$300,000

Prepare the journal entries to record the year-end recognition of fair value for each of the five years.

Date

Cash Interest Received

Interest Revenue recorded

Premium Amortized

Unamortized Premium

Carrying

Value of Investment

1/1/13

$22,744.44

$322,744.44

12/31/13

$36,000

$32,274.44

$3,725.56

$19,018.88

319,018.88

12/31/14

36,000

31,901.89

4,098.11

$14,920.77

314,920.77

12/31/15

36,000

31,492.08

4,507.92

$10,412.85

310,412.85

12/31/16

36,000

31,041.29

4,958.71

$5,454.14

305,454.14

12/31/17

36,000

30,545.86

5,454.14

0

300,000.00

 

 

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