On January 1, the Cheng Corporation purchased $10,000 of 5%, five-year bonds as a long term investment. Interest is paid annually. The company is not involved in active trading of securities.

Required

Using the format presented in the chapter, record each of the following transactions.

A. Record the purchase of the bonds for $10,000.

B. Record the receipt of the first interest payment on the bonds in part A.

C. Assuming the company intends to hold the bonds to maturity, what entry is necessary at the end of the first year if the market value of the bonds is $10,400 at that time?

D. Show how the answer to part C would differ if the company does not intend to hold the bonds to maturity.

E. Assume that the company purchased these bonds at a cost of $10,445. This price yields an effective rate of 4%.

F. Record the receipt of the first interest payment on the bonds purchased in part E.

G. Assuming the company intends to hold the bonds to maturity, prepare the necessary entry at the end of the first year to reflect the $10,400 market value of the bonds.

H. Show how the answer to part G would differ if the company does not intend to hold the bonds to maturity.

I. Report the carrying value (book value) of the bonds at the end of the first year in parts C, D, G, and H. Explain how the amounts have been calculated.

J. Prepare an amortization table for the bonds purchased in E, assuming the company holds the bonds to maturity. What is the total amount of cash received? What is the total amount of interest revenue? What is the difference between the two?