In: Accounting
On January 1, 2021, Wildcat Company purchased $93,000 of 10% bonds at discount. The market interest rate is 12%. The bonds are to be held-to-maturity, and will last for 3 years. The bonds pay interest semiannually on January 1 and July 1.
Required: (1.) Prepare the appropriate journal entry to record the acquisition of the bonds. (2.) Record the first two interest payments.
Face Value of bonds : $93,000
Interest rate : 10%
Semiannual interest : $93,000 * 10% / 2 = $4,650
Market rate : 12%
Annuity value @6% for 6 periods (3 years) : 1/(1.06)^1 +1/(1.06)^2 +.............1/(1.06)^6 = 4.91732
PV value @6% for 6 periods : 1/(1.06)^6 = 0.70496
Purchase price of bonds = $93,000 * 0.70496 + $4,650 * 4.91732 = $88,427
Interest Income for first 6 months : $88,427 * 6% = $5,306
Book value of bonds after first payment : Purchase price + Interest income - Interest received
= $88,427 + $5,306 - $4,650
= $89,083
Interest income for second 6 months : $89,083 * 6% = $5,345
Journals as required :
Date | Account title | Debit | Credit |
1 January, 2021 | Investment | $93,000 | |
Discount on purchase | $4,573 | ||
Cash | $88,427 | ||
1 July, 2021 | Cash | $4,650 | |
Discount | $656 | ||
Interest Income | $5,306 | ||
1 Jan, 2022 | Cash | $4,650 | |
Discount | $695 | ||
Interest income | $5,345 |