Bray Co. acquired $30,000 of Honey Sales Co.’s 7% bonds, interest payable semiannually, bonds maturing in five years. The bonds were acquired at $32,626, a price to return approximately 5%.

Instructions:

1. Prepare tables to show the periodic adjustments to the investment account and the annual bond earnings, assuming adjustment by each of the following methods:

(a) The straight-line method and

(b) The effective-interest method. (Round to the nearest dollar.)

2. Assuming the use of the effective-interest method, prepare journal entries for each company for the first year.