On January 1 2014 Mustafa Limited paid 537 907 40 for 12

#2058
On January 1, 2014, Mustafa Limited paid $537,907.40 for 12% bonds with a maturity value of
$500,000. The bonds provide the bondholders with a 10% yield. They are dated January 1,
2014, and mature on January 1, 2019, with interest receivable on December 31 of each year.
Mustafa accounts for the bonds using the amortized cost approach, applies ASPE using the
effective interest method, and has a December 31 year end.Instructions(a) Prepare the journal
entry to record the bond purchase.(b) Prepare a bond amortization schedule, rounding to two
decimal places.(c) Prepare the journal entry to record interest received and interest income for
2014.(d) Prepare the journal entry to record interest received and interest income for 2015.(e)
Prepare the journal entry to record the redemption of the bond at maturity.(f) If Mustafa used the
straight-line method of discount/premium amortization, prepare the journal entry to record
interest received and interest income the company would make each year.(g) Compare the total
interest income reported over the five-year period under the effective interest method and the
straight-line method. What can you conclude?(h) Why might a reader of the financial statements
find the effective interest method more relevant than the straight line method?View Solution:
On January 1 2014 Mustafa Limited paid 537 907 40 for 12

ANSWER
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