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 adjusting entry to amortize the bond investment on December 31, 2012 would include a:

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The bond was purchased at a discount, which means over time, its carrying value will increase. To expense this increase in value and recognize interest revenue, the company needs to amortize the bond investment. The annual interest payment on the bond is $6,000 (i.e., $100,000 x 6%), which is paid semi-annually. Therefore, the semi-annual interest payment is $3,000 (i.e., $6,000 / 2). Since the bond was purchased at a discount, the amortization will increase by $200 (i.e., $3,000 x 6.67% -- the semiannual interest rate). There is no impact on cash, as the interest was already received earlier in the year. The adjusting entry should be a debit to Long-Term Investment in Bonds for $1,200 (i.e., $200 amortization x 6 periods), and a credit to Interest Revenue for $1,200.

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