In: Accounting
The Bradford Company issued 8% bonds, dated January 1, with a
face amount of $75 million on January 1, 2018 to Saxton-Bose
Corporation. The bonds mature on December 31, 2037 (20 years). For
bonds of similar risk and maturity, the market yield is 10%.
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)
(Use appropriate factor(s) from the tables
provided.):
Required:
1. to 3. Prepare the journal entry to record the
purchase of the bonds by Saxton-Bose on January 1, 2018, interest
revenue on June 30, 2018 and interest revenue on December 31, 2018
(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.)
Solution 1 to 3:
Computation of bond price | |||
Table values are based on: | |||
n= | 40 | ||
i= | 5.00% | ||
Cash flow | Table Value | Amount | Present Value |
Par (Maturity) Value | 0.14205 | $75,000,000.00 | $10,653,426 |
Interest (Annuity) | 17.15909 | $3,000,000.00 | $51,477,259 |
Price of bonds | $62,130,685 |
Journal Entries - Saxton - Bose Corporation | ||||
Event | Date | Particulars | Debit | Credit |
1 | 1-Jan-18 | Investment in Bond Dr | $75,000,000 | |
To Cash | $62,130,685 | |||
To Discount on bond investment | $12,869,315 | |||
(Being investment in bond recorded) | ||||
2 | 30-Jun-18 | Cash Dr ($75,000,000 * 8% * 6/12) | $3,000,000 | |
Discount on bond investment Dr | $106,534 | |||
To Interest revenue ($62,130,685*10%*6/12) | $3,106,534 | |||
(Being revenue recognition for bond interest and discount amortized) | ||||
3 | 31-Dec-18 | Cash Dr ($75,000,000 * 8% * 6/12) | $3,000,000 | |
Discount on bond investment Dr | $111,861 | |||
To Interest revenue [($62,130,685 + $106,534)*10%*6/12] | $3,111,861 | |||
(Being revenue recognition for bond interest and discount amortized) |