Answer:
A) July 1, 2016, 3% bonds are acquired as long term investment.
Dr Investment in 3% bonds 720,000
Cr Cash 600,000
Cr Discount on investment in 3% bonds 120,000
B) December 31, 2016, interest earned from investment in 3% bonds.
Dr Cash 10,800
Dr Discount on investment in 3% bonds 1,200
Cr Interest revenue 12,000
Explanation:
the bonds' face value is $720,000 but since the company paid only $600,000 for them, it means that it bought them at a discount price. Therefore, the discount, $720,000 - $600,000 = $120,000, must be recorded, and later amortized.
To calculate the amount of interest revenue that will be amortized as discount on investment:
(bonds' market price x market interest rate x 1/2) - (bonds' face value x coupon rate x 1/2) = ($600,000 x 4% x 1/2) - ($720,000 x 3% x 1/2) = $12,000 - $10,800 = $1,200
