On January 1, 2011, Nora Company purchased a bond with a par value of $100,000 in the market for $107,986. The bond has a 5-year life and has a stated interest rate of 10% payable annually. The market interest rate at January 1, 2011, is 8%. The following bond amortization schedule is provided for this bond.

Instructions:

1. Prepare the journal entry to record the purchase of this bond on January 1, 2011, assuming the bond is held for investment
2. Prepare the journal entry to record the interest on December 31, 2011
3. Prepare the journal entry to record the sale of bond on January 1, 2013 for $103,704.

Answer for Exercise 5:

Date	Account Title	Debit	Credit
a)Jan 1, 2011
b)Dec 31, 2011
c)Jan 1,2013
	Loss on sale of investment
	Debt investment

\begin{tabular}{|c|c|c|c|c|} \hline \multicolumn{5}{|c|}{\begin{tabular}{l} EFFECTIVE-INTEREST METHOD \\ 10% BOND DISCOUNTED AT 8% \end{tabular}} \\ \hline Date & \begin{tabular}{l} Cash \\ Received \end{tabular} & \begin{tabular}{l} Interest \\ Revenue \end{tabular} & Premium Amortized & \begin{tabular}{l} Carrying Amount \\ of Bonds \end{tabular} \\ \hline \begin{tabular}{c} 1/1/11 \\ 12/31/11 \\ 12/31/12 \end{tabular} & \begin{tabular}{c} $10,000 \\ 10,000 \end{tabular} & \begin{tabular}{l} $8,638 \\ $8,530 \end{tabular} & \begin{tabular}{c} $1,362 \\ 1,470 \end{tabular} & \begin{tabular}{c} $107,986 \\ $106,624 \\ 105,154 \end{tabular} \\ \hline \end{tabular}