On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The entry to amortize the bond investment on July 1, 2012 would include a:

Question

Quizplus · Accepted Answer

To amortize the bond investment, we need to recognize interest revenue and adjust the carrying value of the investment. Since interest is paid semiannually, on January 1 and July 1, it means that from January 1 to July 1, 2012, 6/12 of the annual interest rate of 6% will have accrued.

The bond investment was purchased at a discount, so its carrying value needs to be adjusted upward to the face value by amortizing the discount over the term of the bonds. The discount is the difference between the purchase price and the face value, which is $100,000 - ($100,000 x 90.4%) = $9,600.

Therefore, the entry on July 1, 2012, would be:
Debit: Long-Term Investment in Bonds $1,200 ($100,000 x 6% x 6/12)
Credit: Interest Revenue $1,200
Debit: Discount on Bond Investment $200 ($9,600 x 6/24)
Credit: Long-Term Investment in Bonds $200

The debit to Long-Term Investment in Bonds for $1,200 is the adjustment for interest revenue earned, and the debit to Discount on Bond Investment for $200 is the adjustment for the amortization of the bond discount. The debit to Cash is not necessary because we are not recording any cash transactions at this time.

On January 1, 2012, Plymouth Company Purchases $100,000, 6% Bonds