(Learning Objective 4: Accounting for a bond investment purchased at a premium)
Insurance companies and pension plans hold large quantities of bond investments. Wolverine Insurance Corp. purchased $600,000 of 6% bonds of Eaton, Inc., for 106 on March 1, 20X4. These bonds pay interest on March 1 and September 1 each year. They mature on March 1, 20X8. At December 31, 20X4, the market price of the bonds is 103.5.
Required
1. Journalize Wolverine’s purchase of the bonds as a long term investment on March 1,
20X4 (to be held to maturity), receipt of cash interest, and amortization of the bond
investment at December 31, 20X4. The straight line method is appropriate for amortizing the bond investment.
2. Show all financial statement effects of this long term bond investment on Wolverine Insurance Corp.’s balance sheet and income statement at December 31, 20X4.