On January 1, 2021, Wildcat Company purchased $93,000 of 10% bonds at discount.

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.

Solutions

Expert Solution

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

ekkarill92 answered 2 years ago

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