Accounting for Debt Instruments Purchased at a Discount - FV-NI

question 7

Essay

Accounting for debt instruments purchased at a discount - FV-NI model
On January 1, 2020, Pluto Corp. acquired 6%, $ 100,000 (face value) bonds of Uranus Ltd., to yield 8%. The bonds were dated January 1, 2020, and mature on December 31, 2025, with interest payable each January 1. Pluto intends to hold the bonds to maturity, and will use the FV-NI model and the effective-interest method of amortization of bond premium or discount.
Instructions
Prepare the following entries in Pluto's books:
a) Acquisition of bonds on January 1, 2020,
b) Year-end adjusting entry at December 31, 2020,
c) Receipt of the first interest payment on January 1, 2021.
Round all values to the nearest dollar.

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Definitions:

Premium

A premium is the amount paid for an insurance policy, representing the price for the insurance coverage or the amount over the nominal value of something.

Advanced Degrees

Educational certifications beyond the undergraduate level, including master's, doctoral, and professional degrees.

Median Earnings

The middle value of earnings in a given distribution, where half of the observation points are below and half above.

Labor Market

The marketplace where the supply of workers is met by the demand for them by employers, determining employment levels and wages.