On January 1, 2011, the Nevada Company purchased $800,000 of Utah Company's 10 percent, 20-year bonds at 104 and classified the investment as held-to-maturity securities. The bonds pay interest on January 1 and July 1 of each year. Nevada uses straight-line amortization for all premiums and discounts. The entry for the receipt of the semiannual interest on July 1, 2011, is

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The semiannual interest received on July 1, 2011, is $40,000. However, since the bonds were purchased at a premium, the premium needs to be amortized using straight-line amortization. The premium of $8,000 ($800,000 x 104% - $800,000) is divided by the 40 interest payments to be received over the life of the bonds, resulting in a premium amortization of $200 per interest payment ($8,000 ÷ 40). Therefore, the bond interest revenue is calculated as $40,000 - $200 = $39,200. Thus, the correct journal entry is Cash 40,000, Investment in Held-to-Maturity Securities 800, Bond Interest Revenue 39,200.

On January 1, 2011, the Nevada Company Purchased $800,000 of Utah