Question

McWherter Instruments sold $550 million of 10% 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 12%. Interest is paid semiannually on June 30 and December 31. Blanton Technologies, Inc., purchased $550,000 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).

Answer 1

1.Price of bond issued on January 1,2018:

Particulars	Amount (in million $)
Face value of bonds	550
Interest @ 5% (As Interest is paid semi-annually(10/2)	27.5
Annuity Factor PVAF @6% for 40 Periods (As semi-annual rate has been taken for calculation (12/2=6%) So period will be changed from 20 to 40	15.05
Total Present value of interest during the bond Period (27.5*15.05)	413.875
PV of bond redeemed after 20 years (40 Periods) PVF@6% for 40 years=.09722*550	53.471
Price of bond (413.875+534.71)	467.346

2) Journal Entries:

A) Issue of bond by Mcwhater:

  

Date	Journal Accounts	Debit (in million$)	Credit (in million$)
January 1,2018	Cash	467.346
	Discount on issue of bond	82.654
	To 10% Bond		550
	(Being the issue of bond at discount)

B) Record of Investment:

Date	Journal Accounts	Debit (in Million$)	Credit (in million$)
January 1,2018	Investment in bonds	467.35
	To cash		467.35
	(Being investment made recorded )

3) A) Interest Journal Entries :

Date	Journal Accounts	Debit (in million$)	Credit (inmillion $)
June 30,2018	Interest	27.5
	To Cash		27.5
	(Being payment of interest recorded)

B) Interest entries in Blaton books:

Date	Journal Accounts	Debit (in million$)	Credit (in million$)
June 30,2018	Investment A/C	28.04
	To Interest		28.04
	(Being interest amount recognised at 6%)
June 30,2018	Cash A/C	27.5
	TO Investment		27.5
	(Being amount received adjusted against investment)

4 Interest Entries on Dec 31,2018

A) McWherter:

Date	Journal Accounts	Debit (in million$)	Credit (in million$)
Dec 31,2018	Interest	27.5
	To Cash		27.5
	(Being payment of interest recorded)

B) Blaton Books

Date	Journal Accounts	Debit (in million$)	Credit (in million$)
Dec 31,2018	Investment A/C (467.89*6/100)	28.07
	To Interest		28.07
	(Being interest amount recognised at 6%)
Dec 31,2018	Cash A/C	27.5
	TO Investment		27.5
	(Being amount received adjusted against investment)

Note No-1: Investment on Dec 31,2018

Intial Investment recognised=$467.35

+ Interest Recognised=$28.04

-Interest Received=$(27.5)

Balance of investment on Dec 31,2018=$467.89