Question - On January 1, 2010, 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, 2015. Novotna Company uses the effective-interest method to amortize discount or premium. On January 1, 2012, Novotna Company sold the bonds for $370,726 after receiving interest to meet its liquidity needs.
a. Prepare journal entry to record purchase of bonds on Jan. 1. (Assume 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, 2010, and Dec. 31, 2010.
d. If fair value of Aguirre bonds is $372,726 on Dec. 31, 2011, prepare the necessary adjusting entry. (Assume the securities fair value adjustment balance on Jan 1, 2011 is a debit of $3,375.)
e. Prepare journal entry to record the sale of the bonds on Jan 1, 2012.