ENO Capital Corporation is a real estate investment trust that invests in residential mortgages guaranteed by Fannie Mae and Freddie Mac. As a result, it regularly sells bonds to
raise the cash necessary to fund its purchases.
On February 1, 2021, when the market rate of interest was 4.25%, ENO sold $5,000,000 of 5.0% coupon and 5-year bonds. Interest is payable on February 1 and August 1. The bonds sold for a total of $5,167,327.26. Later in the year, on September 1, 2021, when the market rate of interest was 6.5%, ENO sold $5,000,000 of 6.0% coupon and 5-year bonds. Interest is payable on March 1 and September 1. These bonds sold for a total of $4,894,720.06.
ENO uses the effective interest rate method to amortize bond premiums and accrete bond discounts.
a. Prepare in good form the journal entry ENO must record upon the sale of each bond.
b. Prepare the complete amortization/accretion schedule for each bond.
c. What amount of interest expense on the two bonds will ENO recognize:
i. in 2021?
ii. in 2022?
d. What is the carrying value of each bond on December 31, 2023?
e. Prepare in good form the journal entry ENO must record to record the payment of interest and principal upon each bond’s maturity. In which section of the Statement of Cash Flows will each of these payment amounts appear?