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McWherter Instruments sold $500 million of 8% bonds, dated January 1, on January 1, 2018. The...

McWherter Instruments sold $500 million of 8% bonds, dated January 1, on January 1, 2018. The bonds mature on December 31, 2037 (20 years). For bonds of similar risk and maturity, the market yield was 10%. Interest is paid semiannually on June 30 and December 31. Blanton Technologies, Inc., purchased $500,000 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, 2018.
2. Prepare the journal entries to record (a) their issuance by McWherter and (b) Blanton's investment on January 1, 2018.
3. Prepare the journal entries by (a) McWherter and (b) Blanton to record interest on June 30, 2018 (at the effective rate).
4. Prepare the journal entries by (a) McWherter and (b) Blanton to record interest on December 31, 2018 (at the effective rate).
?

Solutions

Expert Solution

Par value of Bonds 500,000,000
Stated rate of interest 8%
Semi annual cash interest 20,000,000
(500000,000*8%*6/12)
Annuity present value factor for 40 periods 17.1591
PVF at 5% for 40th periiod 0.142
Present value of interest 343182000
Present value of maturity 71000000
ISSUE price 414182000
Amort Chart
Date Cash Interest Interest Discount Unamortized Carrying
Expense Amortized Discount Value of bonds
01.01.18 85818000 414182000
30.06.18 20,000,000 20709100 709100 85108900 414891100
31.12.18 20,000,000 20744555 744,555 84,364,345 415,635,655
Journal entries in Mc Wherter
Date Accounts title and explanation Debit $ Credit $
Jan 1 2018 Cash account Dr. 414182000
Discount on bonds payable Dr. 85818000
     Bonds payable Account 500,000,000
june 30 2018 Interest expense Account Dr. 20709100
     Cash account 20,000,000
     Discount on bonds payable 709,100
Ddec31 2018 Interest expense Account Dr. 20744555
     Cash account 20,000,000
     Discount on bonds payable 744,555
Journal entries for Blanton
Date Accounts title and explanation Debit $ Credit $
Jan 1 2018 Investment in Mc wherter Bonds Dr. 500,000
    Cash account 414182
     Discount on Investment 85,818
June 302018 Cash account Dr. 20000
Discount on investment Dr. 709
    Interest revenue 20709
Dec31 2018 Cash account Dr. 20000
Discount on investment Dr. 745
    Interest revenue 20745

ekkarill92 answered 1 year ago
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