A five-year $100,000 bond with a 7% stated interest rate and a 5% yield rate is purchased


QUESTION :

A five-year $100,000 bond with a 7% stated interest rate and a 5% yield rate is purchased on December 31, 2013 for $108,660. The bond matures on December 31, 2018. Interest is to be received at the end of each year. The following amortization schedule reflects interest to be received, interest revenue, amortization of bond premium, and amortized cost of the bond investment at year end.

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Stated Amortized Effective Interest Cost $108,660 107,093 105,447 103,719 101,905 100,000 Interest Date 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 Totals Amortization $ 7,000 7,000 7,000 7,000 7,000 $ 5,433 5,354 5,272 5,186 5,095 $1,567 1,646 1,728 1,814 1.905

The following presents a comparison of the amortized cost and market value (assumed) of the bond at year end.

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Instructions

(a) Record the journal entries at December 31, 2013, December 31, 2014, and December 31, 2015, assuming the bond is classified as held-to-maturity.

(b) Assuming the bond is classified as held-to-maturity, describe what will be reflected in the income statement and balance sheet prepared at December 31, 2014 and December 31, 2015 with regard to this investment.

(c) Record the journal entries at December 31, 2013, December 31, 2014, and December 31, 2015, assuming the bond is classified as available-for-sale.

(d) Assuming the bond is classified as available-for-sale, describe what will be reflected in the income statement and balance sheet prepared at December 31, 2014 and December 31, 2015 with regard to this investment.

(e) Assuming the bond is classified as held-to-maturity, prepare the journal entry to record the sale of the investment if it is sold on January 2, 2016 for $107,250.

(f) Assuming the bond is classified as available-for-sale, prepare the journal entry to record the sale of the investment if it is sold on January 2, 2016 for $107,250.

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