On January 1,2015,Dooley Company purchases $100,000,6% bonds at a price of 90.4 and a maturity date of January 1,2025.Dooley Company intends to hold the bonds until their maturity date.Interest is paid semiannually,on January 1 and July 1.Dooley Company has a calendar year end.The entry for the receipt of interest on July 1,2015 is:

Question

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Since the bonds were purchased at a discount, interest revenue should be recognized on the effective interest method. Under this method, interest revenue is calculated by multiplying the carrying value of the bonds (which includes the discount) by the effective interest rate. In this case, the effective interest rate is 6.31% ($6,000 in interest payments divided by the $95,960 carrying value of the bonds at purchase). Therefore, the interest revenue for the six-month period ending June 30, 2015 is $3,030 ($95,960 x 6.31% x 6/12). Since the interest is received on July 1, 2015, the journal entry is a debit to Cash and a credit to Interest Revenue, both for $3,000.

On January 1,2015,Dooley Company Purchases $100,000,6% Bonds at a Price