Insurance companies and pension plans hold large quantities of bond investments Prairie Insurance Corp. purchased ($ 600,000)
Question:
Insurance companies and pension plans hold large quantities of bond investments Prairie Insurance Corp. purchased \(\$ 600,000\) of \(5 \%\) bonds of Eaton Inc. for 104.5 on March 1 2020, when the effective interest rate was 4\%. These bonds pay interest on March 1 and September 1 each year. They mature on March 1, 2025. At February 28, 2021, the market price of the bonds is 103.5 .
{Requirements}
1. Journalize Prairie's purchase of the bonds as a long-term investment on March 1, 2020 (to be held to maturity); receipt of cash interest and amortization of the bond investment on September 1, 2020, and accrual of interest revenue and amortization at February 28, 2021. Use the effective-interest method for amortizing the bond investment.
2. Show all financial statement effects of this long-term bond investment on Prairie Insurance Corp.'s balance sheet and income statement at February 28, 2021.
Step by Step Answer:
Financial Accounting
ISBN: 9780135433065
7th Canadian Edition
Authors: Walter Harrison, Wendy Tietz, C. Thomas, Greg Berberich, Catherine Seguin