Exercise 1

Hound Company on January 2020, purchased 5% bonds, having a maturity value of $500,000, for $428,938. The bonds provide the bondholders with a 7% yield. They are dated January 1, 2020, and mature January 1, 2030, with interest receivable June 30 and December 31 of each year. Hummer Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

Instructions

(a) Prepare the journal entry at the date of the bond purchase.

(b) Prepare the first 3 years of a bond amortization schedule.

(c) Prepare the journal entries to record the interest received and the amortization for 2020.