Insurance companies and pension plans hold large quantities of bond investments. Neill Insurance Corp. purchased $2,500,000 of 6.0% bonds of Summerville, Inc., for 116 on January 1, 2014. These bonds pay interest on January 1 and July 1 each year. They mature on January 1, 2018. At October 31, 2014, the end of the company’s fiscal year, the market price of the bonds is 109.
1. Journalize Neill’s purchase of the bonds as a long-term investment on January 1, 2014 (to be held to maturity), receipt of cash interest, and amortization of the bond premium at July 1, 2014. The straight-line method is appropriate for amortizing the bond investment.
2. Journalize the accrual of interest receivable and amortization of premium on October 31, 2014 (round the answer to the nearest whole number).
3. Show all financial statement effects of this long-term bond investment on Neill Insurance Corp.’s balance sheet at October 31, 2014, and income statement for the year ending October 31, 2014.