Question #1 (40 Marks)

On July 31, 2020 Marquis Inc. purchased 7%, $150,000, 10-year bonds. Interest is paid annually on December 31. Marquis uses the amortized cost model and the effective interest method for amortizing premium or discount. The current market rate was 8% and as a result Marquis paid $139,935 for the bonds. On December 31, 2020, the bonds have a market value of $135,000. The bonds had a market value of $138,000 on December 31, 2021.

Instructions

Assuming the company uses amortized cost to account for the investment:

a) Record the entry for the purchase of the bonds.

b)Record the receipt of interest and amortization of the discount for 2020and 2021.

c)Record any year-end adjustments required.

Assume the company does not intend to hold the bonds to maturity and therefore uses FV-NI to account for the bonds:

d) Record the entry for the purchase of the bonds.

e)Record the receipt of interest and amortization of the discount for 2020 and any year end adjustment required.

f)Record the receipt of interest and amortization of the discount for 2021 and any year end adjustment required.