Answer:
investment on bonds   200 millions
premium on bonds         40 millions
                         cash                            240 millions
to record the purchase of bonds
cash                             7 millions
       interest revenue             6 millions
       premium on bonds         1 million
interest proceeds of december 31th
Balance sheet:
bonds      200
premium    39
net            239
cash                                             250 millions
               investment on bonds                         200 millions
               premium on bonds                               39 millions
               gain on sale of invesment                    11   millions 
to record the sale of bonds
                         
Explanation:
<u>recording the bonds:</u>
acquisition             240
bonds face value (200)
premium                  40
It is a premium, as the bonds where purchased at higher price than face value
<u>Interest at December 31th</u>
To calculate the interest, we will calcualte the interest per payment:
7% annual coupon rate /2 payment per year = 3.5% semi-annual rate
5% market rate /2 payment per year = 2.5% semi-annual market rate
cash proceeds: 200 x 3.5% = 7
interest revenue:
carrying value x market rate
 240 x 2.5% = 6
amortization 7 - 6 = 1
<u>Value in the balance sheet:</u>
the net value of the bond will be the face value plus the carrying value of the premium
<u>Sale of the bonds:</u>
selling price                           250
carrying value of the bonds (239)
gain on sale of bonds              1 1
It is a gain, as the bonds are being sold at a higher price than his carrying value.