On January 2, Terrace Co. purchased $100,000 of 10-year, 4% bonds from Inverness Ltd. for $88,580 cash. The effective interest yield for this transaction is 5.5%. The bonds pay interest on January 1 and July 1. Terrace’s business model is to hold and collect the contractual cash flows of interest and principal until maturity. The company follows IFRS and their year-end is December 31.

Required:

a. What is the discount or premium, if any, for this investment? Explain why a premium or discount could occur when purchasing bonds.

b. Record the bond purchase, the first two interest payments, and any year-end adjusting entries, rounding amounts to the nearest whole dollar.

c. Record the entries from part (b), assuming now that Terrace follows ASPE and has chosen the alternative method to account for the premium or discount, if any.