On January 1, 2019, Kelly Corporation acquired bonds with a face value of $500,000 for $483,841.79, a price that yields a 10% effective annual interest rate. The bonds carry a 9% stated rate of interest, pay interest semiannually on June 30 and December 31, are due December 31, 2022, and are being held to maturity.

1. Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the straight-line method of amortization. If required, round your answers to the nearest cent. For compound entries, if an amount box does not require an entry, leave it blank.

June 30 entry

Debt Securities Investment 493,841.79 debit

Discount on D-S Investment    6,158.21 debit

                       Cash                           500,000 credit

--to record bonds purchase--

Cash       22,500 debit

Discount on D-S Investment   769.78 credit

Interest revenue                  21,730.22‬ credit

--to record first interest collection--

Interest receivables  22,500 debit

Discount on D-S Investment   769.78 credit

Interest revenue                  21,730.22‬ credit

--to record second interest collection--

Explanation:

cost                493,841.79

face value    500,000.00  

discount:            6,158.21‬

We divide this over the total payment left:

6,158.21 /  8  =  769,78

interest proceeds

500,000 x 9% / 2 = 22,500.00

amorization                  (769.78)  

Interest revenue       21,730.22‬

Explanation:

Face value   =                   500000

Discount      =                    -16158.21

Fair Value    =                    483841.79

Amortization Schedule

year           Amount            Interest              repay                   Closing

6 months    483841.79         0                     22500            461341.79

6 months     461341.79     48384.2         22500            487225.96

investment in bond     483841.79

            Cash                      483841.79

To record the investment at amortized cost.

Cash        22500

    Investment    22500

to record the semi annual interest payment

Cash                22500

Investment      25884.2  

                 Interest Income   48384.2

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