b.

Acquisition of bonds between interest dates using effective interest method (at bond
discount)

On January 1, 2016, Ajuju Company purchased as a long term investment P 5,000,000

face value of Kirara Companys 8% bonds for P 4,562,000. The bond was purchased to
yield 10% interest.

The bond mature on January 1, 2021 and pay interest annually on December 31. The
effective interest method of amortization is used.

1. Prepare corresponding solutions and journal entries.

2. What is the interest income for 2017?
3. What is the carrying amount of investment in December 31, 2017?
4. On June 30, 2020 the bonds are sold at 110 plus accrued interest. Provide the
computation and journal entries to record the sale of bonds.

ANSWERS:

1. Prepare corresponding solutions and journal entries.

Interest Interest Discount Carrying

Date received income Amortization Amount
01/01/16 4,562,000
12/31/16 400,000 456,200 56,200 4,618,200
12/31/17 400,000 461,820 61,820 4,680,020
12/31/18 400,000 468,002 68,002 4,748,022
12/31/19 400,000 474,802 74,802 4,822,824
12/31/20 400,000 222,824 177,176 5,000,000
438,000

Face amount 5,000,000

Cost 4,562,000
Bond Discount 438,000

2016

Jan 1 Investment in bonds 4,562,000

Cash 4,562,000
Acquisition of the bonds

Dec 31 Cash 400,000

Interest income 400,000
Annual interest received

Dec 31 Investment in bonds 56,200

 Interest income 56,200
Amortization of discount for one year

2017

Dec 31 Cash 400,000

Interest income 400,000
Annual interest received

Dec 31 Investment in bonds 61,820

Interest income 61,820
Amortization of discount for one year

2. What is the interest income for 2017? 461,820

3. What is the carrying amount of investment in December 31, 2017? 4,680,020

Carrying Amount January 1, 2016 4,562,000

Amortization of Discount for 2016
Interest Income (4,562,000 x 10%) 456,200
Interest Received ( 5,000,000 x 8%) 400,000 56,200
4,618,200

Carrying Amount December 31, 2016 4,618,200

Amortization of Discount for 2016
Interest Income (4,618,200 x 10%) 461,820
Interest Received ( 5,000,000 x 8%) 400,000 61,820
4,680,020

4. On June 30, 2020 the bonds are sold at 110 plus accrued interest. Computation
and journal entries to record the sale of bonds.

June 30, 2020

Investment in bonds 88,588

Interest income (177,176 x 1/2) 88,588
To record discount amortization

Cash 5,700,000