Question

The Bradford Company issued 10% bonds, dated January 1, with a face amount of $80 million on January 1, 2021 to Saxton-Bose Corporation. The bonds mature on December 31, 2030 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Required:
1. to 3. Prepare the journal entries to record the purchase of the bonds by Saxton-Bose on January 1, 2021, interest revenue on June 30, 2021 and interest revenue on December 31, 2021 (at the effective rate). (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Computation of Bond current market price = PV of principal + PV of interest

PV of interest ($80,000,000*10%/2*AF@6% for 20 years) = $45,879,600

PV of principal ($80,000,000*0.3118) =$24,944,000

Current market price of bond = $70,823,600

(PVF@6% for 20 years   = 0.3118

AF@6% for 20 years is   11.4699)

Journal entries

Date	Particulars	Debit	Credit
1jan	investment in bond	$80,000,000
	Discount on bond investment		$9,176,400
	Cash		$70,823,600
	(being bond purchased)
30 jun	cash($80,000,000*5%)	4,000,000
	Discount on bond investment	249,416
	Interest revenue ($70,823,600*6%)		$4,249,416
	(being interest income recorded)
31 dev	cash	$4000,000
	Discount on bond investment	$264380.96
	Interest revenue ($70,823,600+$249,416)*6%		4,264,380.96
	(being interest income recorded)