Investment in Debt Securities

On January 1, 2021, McCafferty Company purchased 6% 5-year bonds, having a maturity value of $800,000 for $735,110. The bonds provide the bond holders with an 8% yield. They are dated January 1, 2021, and they mature on January 1, 2026. Interest is receivable semi-annually on July 1 and January 1 of each year. McCafferty uses the effective interest method to allocate unamortized discount or premium. McCafferty does not plan to hold the bonds until maturity and did not purchase them to sell in the near term.

Instructions:

a. Prepare a bond amortization table through January 1, 2023.

b. Prepare all necessary journal entries for 2021. The bonds have a market value of $644,000 on December 31, 2021.

c. McCafferty sells the bonds on January 1, 2022, for $756,000 after receiving interest on January 1, 2022. Prepare the journal entry to record the sale.