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Q17BE-3

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Intermediate Accounting (Kieso)
Found in: Page 610

Short Answer

Carow Corporation purchased on January 1, 2017, as a held-to-maturity investment, $60,000 of the 8%, 5-year bonds of Harrison, Inc. for $65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow’s journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual interest and premium amortization. Assume effective-interest amortization is used

  1. The amount debited to debt investment is $65,118.
  2. The amount of premium amortization is $446.
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Step by Step Solution

Definition of discount amortization

Discount amortization is the process of reducing the cost of the bond in each period to show the reality of the bond.

Journal entry of the purchase of the investment

Date

Description

Debit

Credit

January 1, 2017

Debt Investment

$65,118

Cash

$65,118

Being entry to record the purchase of bonds

Journal entry for the receipt of annual interest and discount amortization

Date

Description

Debit

Credit

June 30, 2017

Cash

$2,400

Debt Investment

$446

Interest Revenue

$1,954

Being the entry for bond interest and amortization of the discount

Note:

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