1. On January 1, 2020, Johnstone Co. purchased 8% bonds having a maturity value of $500,000, for $542,124. The bonds, issued by City Bank, provide the bondholders a 6% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest receivable each December 31. Johnstones business model is to hold these bonds until the maturity date to collect contractual cash flows.

Required:

(Round all amounts to the nearest dollar.)

(a) How should this investment be classified by Johnstone? Why?

(b) Prepare the journal entry to record the interest received and the premium amortization for 2020.

(c) Assume Johnstone Co. elected the fair value option for this investment. If the fair value of the bonds is $538,000 on December 31, 2020, prepare any necessary adjusting entry.

(7 marks)