Question - Magenta Inc., on January 1, 2016, purchased a bond with a maturity value of $150,000. The bonds had a 2% per year coupon rate payable annually on December 31. The bond matures in 4 years. The market yield for bonds with equivalent risk and maturity was 4% per year.
Required:
1. Is this a discount bond or premium? Explain why you think so.
2. Compute the amount required to purchase this bond at the beginning of the 4 year period. Provide the journal entry to record the purchase.
3. Provide the amortization schedule for the 4 years. Provide the journal entry required at December 31, 2016, the year of acquisition.
4. If bond interest was payable on January 1, 2017, for the 1st time, how would your entry on December 31, 2016, change (if at all)?
5. If the company followed ASPE and followed the straight line alternative permitted under ASPE, what would the amortization schedule look like for 2016? How would this change your entry on December 31, 2016?