Chapter 9
Investments
457
AP-3B (
1
2
)
To earn some additional interest revenue, Hank Company, a public company, purchased
$200,000 worth of 8%, five-year bonds issued by Ivy Company on January 1, 2016. Interest
payments are made semi-annually on June 30 and December 31 every year. The interest rate
paid by similar bonds is at 4% per year in the market as of January 2016. Assume April 30 is
the year-end for Hank Company.
Required
a) Will Hank Company purchase the bonds at a discount or a premium? Use present value
calculation to support your answer.
b) Prepare journal entries for the acquisition of the bonds, the interest accrual on the first
year-end, the first and last cash receipts of interest, and the cash receipt of principal at
maturity on January 1, 2021.
Date
Account Title and Explanation
Debit
Credit
