Amortized Cost Model}

OBJECTIVE 12 Mayco Financial began operations in 2018 and invests in bonds held to maturity. On January 1, 2018, Mayco acquired a \(\$ 5,000,0006 \%\) bond ( \(6.16 \%\) yield) due December 31,2028 , issued by BAA for \(\$ 4,940,000\). Interest is paid semiannually on June 30 and December 31. On July 1, 2018, Mayco acquired a \(\$ 4,000,0007 \%\) bond ( \(6.4 \%\) yield) due June 30, 2048, issued by KLM for \(\$ 4,080,000\). Interest is paid semiannually on June 30 and December 31 .

\section*{Required:}

1. Prepare the journal entries to record the carrying value of the bonds on December 31, 2018, using the effective rate interest method for bond discount and premium. Include all other entries that are required for 2018 .

2. Prepare the journal entries to record the carrying value of the bonds at December 31, 2018, using the straight-line method of amortization for bond discount and premium. Include all other entries that are required for 2018 .

3. How would your journal entries change if the bonds were acquired for trading and the market value of the bonds on December 31,2018 , were \(\$ 4,985,000\) (BAA bond) and \(\$ 4,090,000\) (KLM bond)?

\section*{Exercise