Question - On January 1, 2014, Copa Company purchased $300,000, 6% bonds of Cabana Co. for $313,128. The bonds were purchased to yield 5% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2019. Copa Company uses the effective-interest method to amortize discount or premium. On January 1, 2016, Copa Company sold the bonds for $305,600 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, 2014, and December 31, 2014.
(d) If the fair value of Cabana bonds is $310,000 on December 31, 2015, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on January 1, 2015, is a credit of $2,790.)
(e) Prepare the journal entry to record the sale of the bonds on January 1, 2016.