On August 1, 2012, Renfro Co.purchased to hold for collection, 1,000, $1,000, 9% bonds for $940,000 (a 10% effective interest rate).The bonds, which mature on August 1, 2022, pay interest semiannually on February 1 and August 1.Renfro uses the effective interest method of amortization.The bonds should be reported in the December 31, 2012 statement of financial position at a carrying value of

Question

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Using the effective interest method, we calculate the interest revenue as follows:
Interest revenue = Carrying value at beginning of period x Effective interest rate for the period
For the first interest payment on February 1, 2013:
Carrying value at beginning of period = Purchase price = $940,000
Effective interest rate for the period = 10% / 2 = 5%
Interest revenue = $940,000 x 5% = $47,000
Journal entry on February 1, 2013:
Debit: Cash $45,000
Debit: Bond discount amortization $2,000
Credit: Interest revenue $47,000
Carrying value at end of period (February 1, 2013) = Carrying value at beginning of period + Interest revenue - Discount amortization
Carrying value at end of period = $940,000 + $47,000 - $2,000 = $985,000
For the second interest payment on August 1, 2013:
Carrying value at beginning of period = Carrying value at end of previous period = $985,000
Effective interest rate for the period = 10% / 2 = 5%
Interest revenue = $985,000 x 5% = $49,250
Journal entry on August 1, 2013:
Debit: Cash $45,000
Debit: Bond discount amortization $4,250
Credit: Interest revenue $49,250
Carrying value at end of period (August 1, 2013) = Carrying value at beginning of period + Interest revenue - Discount amortization
Carrying value at end of period = $985,000 + $49,250 - $4,250 = $1,030,000
Therefore, the bonds should be reported in the December 31, 2012 statement of financial position at a carrying value of $941,667 ($985,000 - $43,333 discount amortization from August 1 to December 31, 2013).