Beanz, go back to Becker chapter.  There is a section that covers what kj-nyc is talking about.  I think the title is Bonds Purchased Between Issuance Dates.  It clearly explains the concept with journal entries (if memory serves me right).  Study the journal entry and you will see the $$ flow.

kj_nyc wrote: Yes, the bonds were issued on Jan 1, and that's why there is the $40,000 accrued interest.  But York did not purchase the bonds until July 1.  This is an example of bonds being purchased between issuance dates.  When that happens, the investor has to pay for accrued interest because he will receive the payment for a full year's interest on Jan 1 of the next year.  But he will have held the bonds for only 1/2 a year and therefore will be entitled to only 1/2 year of interest.  By paying the accrued interest at purchase, he will be refunded that amount on Jan 1 of the next year to net a 1/2 year of interest revenue.

The bonds could also have been bought on the secondary market after having paid interest on Jan 1, in which case the accrued interest would have been paid to the seller. For the purposes of solving this problem, it isn't the most important detail, although I will acknowledge I hadn't thought of your alternative (been awhile since I've studied bonds).

Oh, and when you're trying to do the amortization table, you should adjust for the short first period. If it helps, think of it as 78 months rather than 6.5 years or 13 semi-years.

I still don't get it so I'll just memorize how it's supposed to be done and just hope to not get the question. Like everything in Becker, the book just gives the most basic example under perfect conditions. The book example only goes over the issuer's jouirnal entries, which I understand perfectly, but not the purchaser.

The problem is I followed thee logical of the issuer's entries to make the purchaser's entires, which turned out to be wrong. In the book the issuer records a full year interest expense and amortization expense. The purchasor records the full year interest income, offset by the amount they paid included in the bond, but only half year amortization. It just doesn't seem logical.

As far as the amortization table, I still haven't been able to get it to amortize back to $1,000,000 perfectly and I've tried several ways. The way I think, the way they say, and even the 13 periods/78 months. If any can get it to work out, I'd love to see it.

The first year entry (for the purchaser) would be:

Cash xxx

Investment in Park bonds xxx (add discount amortization)

    Interest recievable xxx

    Interest revenue xxx

You wouldn't amortize the interest you bought (the recievable). Amortization only occurs over the period you own the bond, regardless of the interest dates. The reason why the issuer records a full year is because the issuer pays interest for a full year.

If I have nothing better to do later I'll try and post an amortization table.