On January 1, 2012, Novotna Company purchased $400,000, 8% bonds of Aguirre Co. for $369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2017. Novotna Company uses the effective-interest method to amortize discount or premium. On January 1, 2014, Novotna Company sold the bonds for $370,726 after receiving interest to meet its liquidity needs.
Instructions
(a) Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale.
(b) Prepare the amortization schedule for the bonds.
(c) Prepare the journal entries to record the semiannual interest on July 1, 2012, and December 31, 2012.
(d) If the fair value of Aguirre bonds is $372,726 on December 31, 2013, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on January 1, 2013, is a debit of $3,375.)
(e) Prepare the journal entry to record the sale of the bonds on January 1, 2014.