Question

McWherter Instruments sold $470 million of 10% bonds, dated January 1, on January 1, 2021. The bonds mature on December 31, 2040 (20 years). For bonds of similar risk and maturity, the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Blanton Technologies, Inc., purchased $470,000 of the bonds as a long-term investment. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds issued on January 1, 2021. 2. Prepare the journal entries to record (a) their issuance by McWherter and (b) Blanton's investment on January 1, 2021. 3. Prepare the journal entries by (a) McWherter and (b) Blanton to record interest on June 30, 2021 (at the effective rate). 4. Prepare the journal entries by (a) McWherter and (b) Blanton to record interest on December 31, 2021 (at the effective rate).

Answer 1

1	Issue price=Present value of interest payment+Present value of principal
	Discount factor=Market yield for 6 months=12%*(6/12)=6%
	Interest payment for 6 months=470000000*10%*(6/12)=$ 23500000
	Term of the bond=20 years
	Number of semi-annual periods=20*2=40
	Present value of interest payment=interest payment*PV annuity factor at 6% for 40 years=23500000*15.0463=$ 353588050
	Present value of principal=Principal*PV factor at 6% for 40th year=470000000*0.097222=$ 45694340
	Issue price=353588050+45694340=$ 399282390
2
a)	Issuance by McWherter:
	Date	Account			Debit	Credit
	Jan 1,2021	Cash			399282390
		Discount on bonds		(Bal fig.)	70717610
		Bonds payable				470000000
b)	Blanton's investment:
	Blanton purchased $470000 of the bonds
	% of investment by blanton=470000/470000000=0.001=0.1%
	Date	Account				Debit	Credit
	Jan 1,2021	Investment in bonds				470000
		Discount on bond investment			(Bal fig.)		70718
		Cash	(399282390*0.1%)				399282
3
a)	McWherter to reccord interest:
	Date	Account				Debit	Credit
	June 30,2021	Interest expense		(399282390*12%*6/12)		23956943
		Discount on bonds		(Balancing figure)			456943
		Cash					23500000
b)	Blanton to reccord interest:
	Date	Account				Debit	Credit
	June 30,2021	Cash		(470000*10%*6/12)		23500
		Discount on bond investment			(Bal fig.)	457
		Interest revenue		(399282*12%*6/12)			23957
4
a)	McWherter to reccord interest:
	Date	Account					Debit	Credit
	Dec 30,2021	Interest expense		(399282390+456943)*12%*6/12			23984360
		Discount on bonds		(Balancing figure)				484360
		Cash						23500000
b)	Blanton to reccord interest:
	Date	Account				Debit	Credit
	Dec 30,2021	Cash		(470000*10%*6/12)		23500
		Discount on bond investment			(Bal fig.)	484
		Interest revenue		(399282+457)*12%*6/12			23984