A held to maturity bond investment must use the effective rate interest method.
13) Under private enterprise reporting an organization can use either the effective interest rate method or straight line to account for the amortization of their bond investment.
14) Investments in long-term bonds are shown on the balance sheet at their current market value.
15) From the buyer's perspective, a discount on a long-term investment in bonds means additional interest revenue while a premium means less interest revenue.
16) On May 1, 2010, Gigajoule Company paid $180,000 to purchase $200,000 of bonds that carry a 5% contract rate of interest and will mature in 5 years from the date of purchase. Interest on the bonds is paid May 1 and November 1 of each year. Gigajoule Company plans to hold the bonds until maturity and amortizes the premium or discount on bonds using the straight-line method each interest payment date. As of December 31, 2010, the bonds had a market value of $185,000.
a. Prepare all necessary journal entries for 2010 dealing with the investment in bonds.
b. Show how the bonds would be presented on the balance sheet dated December 31, 2010.
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