On January 1, 2021, Morrison Inc., a public company, purchased $600,000 of Pearl Corporation’s five-year, 4% bonds for $627,660 when the market interest rate was 3%. Interest is received semi-annually on July 1 and January 1. Morrison’s year end is December 31. Morrison intends to hold Pearl’s bonds until January 1, 2026, the date the bonds mature. The bonds’ fair value on December 31, 2021, was $620,000.

Instructions

a. Record the purchase of the bonds on January 1, 2021.

b. Prepare the entry to record the receipt of interest on July 1, 2021.

c. Prepare the adjusting entry required at December 31, 2021.

d. Show the financial presentation of the bonds for Morrison on December 31, 2021.

e. Prepare the entry to record the receipt of interest on January 1, 2022.

f. Prepare the entry to record the receipt on maturity of the bonds on January 1, 2026. Assume the entry to record the last interest payment has been recorded.

g. How would your answers to parts (a) through (c) change if the bonds were purchased for the purpose of trading?

Taking It Further

What was the market interest rate on December 31, 2021, when the bonds’ fair value was $620,000? How many interest periods are left after January 1, 2022?