Question

Vader Corp. purchased $50,000 of Palpatine Ltd. 9% bonds at a price of 103.5 on January...

Vader Corp. purchased $50,000 of Palpatine Ltd. 9% bonds at a price of 103.5 on January 1, 2005. The bonds mature on December 31, 2007. Vader Corp. uses the straight-line method of amortizing any premium or discount on investments in bonds. At December 31, 2005, the market value of the bonds is quoted at 103. At December 31, 2006, the market value of the bonds is quoted at 104. Interest is paid out each year on December 31. Vader Corp. follows ASPE and management accounts for this investment are calculated at amortized cost.

Instructions:

1. Journalize the required entry for purchasing the bonds on January 1, 2005.

2. Journalize the required entry needed on December 31, 2005.

3. Journalize the required entry needed on December 31, 2006.

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Homework Answers

Answer #1

Premium amortization per year = (50000*103.5%-50000)/3= 583.33

Journal:

Particulars Debit Credit
1… Investment in bonds         51,750.00
Cash         51,750.00
2… Cash           4,500.00
Investment in bonds              583.33
Interest revenue           5,083.33
3… Cash           4,500.00
Investment in bonds              583.33
Interest revenue           5,083.33
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