Question

AAA purchased, on January 1, 2020, $80,000 of 9%, 5-year bonds of BBB for $74,086, which
provides an 11% return. The bonds pay interest annually. Effective-interest amortization is used.
When the bonds are purchased as a held-to-maturity investment, prepare AAA’s journal entries
for the receipt of annual interest and discount amortization in 2020.

Answer 1

Ans:

Bonds Purcahsed Face Value : $80,000

Interest Rate : 9%

Purchase Price : $74,086

Market Interest Rate : 11%

Receipt of first Interest and Interest Income:

First Interest Received : Face Value * Interest Rate :

$80,000 * 9% = $7,200

Interest Income for the First Year :

First year Income : Purchase Price * Market Interest Rate:

$74,086 * 11% = $8,149.46

Amortisation of Discount :

First year Income - First Interest Received:

$8,149.6 - $7,200 = $949.46

Journal Entry will be :

Date	Account Title	Debit	Credit
31 Dec 2020	Cash	7,200
	Amortisation of Discount	949.46
	Interest on Investment (Income)		8,149.46

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