Amortizing a Discount on a Bond Investment
Response to the following problem:
On January 1, 2010, the Kelly Corporation acquired bonds with a face value of $500,000 for $483,841.79, a price that yields a 10% effective annual interest rate. The bonds carry a 9% stated rate of interest, pay interest semiannually on June 30 and December 31, are due December 31, 2013 and are being held to maturity.
Required
Prepare journal entries to record the purchase of the bonds and the first two interest receipts using:
1. The straight-line method of amortization.
2. The effective interest method of amortization.