Discount Amortization on Bonds Purchased Between Interest Dates
Response to the following problem:
On October 1, 2009, the Jenkins Corporation bought bonds with a face value of $200,000 for $199,175, which included accrued interest. The bonds are due December 31, 2011 and carry a face rate of interest of 10.5%. Interest on the bonds is payable semiannually on June 30 and December 31. The company uses the straight-line method to amortize the discount.
Required
1. Prepare journal entries to record the purchase of the bonds, each interest receipt, and the retirement of the issue on December 31, 2011.
2. If the company failed to separately record the interest at acquisition, explain the errors that would occur in the company's financial statements (no calculations are required).