Problem: (Debt Securities) Presented below is an amortization schedule related to Kathy Baker Company’s 5-year, $100,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004, for $108,660
| Date |
Cash Received |
Interest Revenue |
Bond Premium Amortization |
Carrying Amount of Bonds |
| 31-12-04 |
|
|
|
$108,660 |
| 31-12-05 |
$7,000 |
$5,433 |
$1,567 |
107,093 |
| 31-12-06 |
7,000 |
5,354 |
1,646 |
105,447 |
| 31-12-07 |
7,000 |
5,272 |
1,728 |
103,719 |
| 31-12-08 |
7,000 |
5,186 |
1,814 |
101,905 |
| 31-12-09 |
7,000 |
5,095 |
1,905 |
100,000 |
The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.
|
|
31-12-05 |
31-12-06 |
31-12-07 |
31-12-08 |
31-12-09 |
| Amortized cost |
$107,093 |
$105,447 |
$103,719 |
$101,905 |
$100,000 |
| Fair value |
$106,500 |
$107,500 |
$105,650 |
$103,000 |
$100,000 |
Instructions:
Q1. Prepare the journal entry to record the purchase of these bonds on December 31, 2004, assuming the bonds are classified as held-to-maturity securities.
Q2. Prepare the journal entry(ies) related to the held-to-maturity bonds for 2005.
Q3. Prepare the journal entry(ies) related to the held-to-maturity bonds for 2007.
Q4. Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available-for-sale.
Q5. Prepare the journal entry(ies) related to the available-for-sale bonds for 2005.
Q6. Prepare the journal entry(ies) related to the available-for-sale bonds for 2007.