Question

McWherter Instruments sold $410 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 $410,000 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

Part-1Computation of Present Value of Bond
Value of Bond	$410,000,000.00
Semi Annual Coupon @ 10% p.a. (410000000*5%) (a)	$20,500,000.00
PVAF @6% for 40 period (b)	15.0463
Present Value of Bond (c=axb)	$308,449,150
PV for Bond at end 0f 40 period (c) ( 410 Million)X PVIF @6% ) (410 Million*0.09722)	$39,860,200
Total PV of Bond (c+d)	$348,309,350

Part-2 Journal Entry- for Bond ( Uses Effective Interest method)
Date	Account Tittle	Debit	Credit
	In the Books of Mcwherter
1-Jan-18	Bank ( Refer Working Note-1)	$348,309,350.00
	Bond Discount (BF)	$61,690,650.00
	Bond Payable		$410,000,000.00
	To Record Bond Issued at Discount
	In the Books of Blanton Technologies
1-Jan-18	Investment in Bond	$348,309.35
	TO Bond Discount (BF)	$61,690.65
	To Cash		$410,000.00
	TO Record Investment

Part-3 :-Journal Entry- for Bond ( Uses Effective Interest method)
Date	Account Tittle	Debit	Credit
	In the Books of Mcwherter
30-Jun-18	Interest Expense (348309350*6%)	$20,898,561.00
	Bank		$20,500,000.00
	Bond Discount		$398,561.00
	TO Rcord Interest Paid on Bond
	In the Books of Blanton Technologies
30-Jun-18	Cash	$20,500.00
	Discount on Bond	$398.56
	Interest Revenue		$20,898.56
	TO Record Interest Revnue
Part-4 :-Journal Entry- for Bond ( Uses Effective Interest method)
Date	Account Tittle	Debit	Credit
	In the Books of Mcwherter
31-Dec-18	Interest Expense (348309350+398561)*6%)	$20,922,474.66
	Bank		$20,500,000.00
	Bond Discount		$422,474.66
	TO Rcord Interest Paid on Bond
	In the Books of Blanton Technologies
31-Dec-18	Cash	$20,500.00
	Discount on Bond	$422.47
	Interest Revenue		$20,922.47
	TO Record Interest Revnue