[jessanqi]

Anyone can help this?? I don’t really understand the last two entries, I think the answer should be Interest income :5100, amortization of bond disc:600.

Thank you!!!!

On July 1, 20X5, Hilltop Company purchased as a long-term investment Essex Company’s ten-year 9% bonds, with a face value of $100,000 for $95,200. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 20X9. Hilltop uses the straight-line method of amortization. What is the amount of interest income and amortization of bond discount that Hilltop should report in its income statement for the year ended December 31, 20X5?

A. $4,284 and $240
B. $4,284 and $600
C. $4,500 and $240
D. $4,500 and $600

Explanation
The correct answer is D. The discount of $4,800 ($100,000 – $95,200) must be amortized over the remaining life of the bonds, or 48 months, resulting in an amortization of $600 per semiannual period. In addition, Essex receives $4,500 each January 1 and July 1 ($100,000 x .09 x 1/2). Since the bonds were purchased on July 1, 20X5, Hilltop would amortize the discount and recognize income for one semi-annual period.

The journal entries for year ended December 31, 20X5 are:
July 1, 20X5

Dr: Investment $100,000
Cr: Discount
$4,800
Cr: Cash
$95,200
(To record acquisition of investment)

December 31, 20X5

Dr: Interest receivable $4,500
Dr. Discount $600
Cr: Interest income
$5,100
(To record 6 month of interest earned on investment)

December 31, 20X5

Dr: Interest receivable $600
Cr: Discount
$600
(To accrue interest owed to investor and amortization of 6 months of discount)

On January 1, 20X6, the entry is:
Dr: Cash $5,100
Cr: Interest receivable
$5,100
(To record receipt of interest and amortization of discount)