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Kathy Baker Company

Debt Securities - Presented below is an amortization schedule related to Kathy Baker Company's 5-year, $100,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004, for $108,660

Date Cash Received Interest Revenue Bond Premium Amortization Carrying Amount of Bonds
12/31/2004 $108,660
12/31/2005 $7,000 $5,433 $1,567 107,093
12/31/2006 7,000 5,354 1,646 105,447
12/31/2007 7,000 5,272 1,728 103,719
12/31/2008 7,000 5,186 1,814 101,905
12/31/2009 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009
Amortized cost $107,093 $105,447 $103,719 $101,905 $100,000
Fair value $106,500 $107,500 $105,650 $103,000 $100,000

Instructions

(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2004, assuming the bonds are classified as held-to-maturity securities. (b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2005. (c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2007. (d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available-for-sale.
(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2005. (f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2007.

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(Debt Securities) Presented below is an amortization schedule related to Kathy Baker Company's 5-year, $100,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004, for $108,660

Date Cash Received Interest Revenue Bond Premium Amortization Carrying Amount of Bonds
31/12/2004 $108,660
31/12/2005 $7,000 $5,433 $1,567 107,093
31/12/2006 7,000 5,354 1,646 105,447
31/12/2007 7,000 5,272 1,728 103,719
31/12/2008 7,000 5,186 1,814 101,905
31/12/2009 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized ...

Solution Summary

This solution is comprised of a detailed explanation to prepare the journal entry to record the purchase of these bonds on December 31, 2004, assuming the bonds are classified as held-to-maturity securities, the journal entry(ies) related to the held-to-maturity bonds for 2005, the journal entry(ies) related to the held-to-maturity bonds for 2007, the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-sale, the journal entry(ies) related to the available-for-sale bonds for 2005, and the journal entry(ies) related to the available-for-sale bonds for 2007.

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