Question 2 (32 marks)

On January 1, 2011, Ellison Company purchased 12% bonds, having a maturity value of $800,000, for $860,652. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2011, and mature January 1, 2016, with interest receivable December 31 of each year. Ellisons business model is to hold these bonds to collect contractual cash flows.

Instructions

(a) Prepare the journal entry at the date of the bond purchase. (4 marks)

(b) Prepare a bond amortization schedule through 2012. (10 marks)

(c) Prepare the journal entry to record the interest received and the amortization for 2011.

(6 marks)

(d) Prepare any entries necessary at December 31, 2011, assuming the fair value of the bonds is

$860,000. (4 marks)

(e) Prepare any entries necessary at December 31, 2012, assuming the fair value of the bonds

is $840,000. (8 marks)