Question

On April 1, 2018, Western Communications, Inc., issued 12% bonds, dated March 1, 2018, with face amount of $32 million. The bonds sold for $31.3 million and mature on February 28, 2021. Interest is paid semiannually on August 31 and February 28. Stillworth Corporation acquired $32,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31, and both firms use the straight-line method.

Required:
1. Prepare the journal entries to record (a) issuance of the bonds by Western and (b) Stillworth’s investment on April 1, 2018.
2. Prepare the journal entries by both firms to record all subsequent events related to the bonds through maturity.

Answer 1

1)

DATE	ACCOUNT TITLE	DEBIT	CREDIT
	In books of Western Communications, Inc.
April 1 2018	cash	31300000
	Discount on bond payable	700000
	Bond payable		32000000
	In books of Stillworth Corporation
April 1 2018	Investment in long term debt securities	32000
	Bond Discount		700
	cash		31300

**Percentage of holding by Stillworth Corporation in bond issuance = 32000/32000000 = .1%

2)Years to maturity= 1March 2018- 28Feb 2021

Number of semiannual months =3*2 =6                    [2semiannual period in a year]

semiannual amortization of bond discount = 700000/6= 116667

semiannual interest = 32000000*.12*6/12=1920000

DATE	ACCOUNT TITLE	DEBIT	CREDIT
	In books of Western Communications, Inc.
August 31 2018 -Feb 28 2021	Interest expense	2036667
	Discount on bond payable		116667
	Cash		1920000
Feb 28 2021	Bond payable	32000000
	cash		32000000
	In books of Stillworth Corporation
August 31 2018 -Feb 28 2021	cash	1920
	Bond discount	117
	Interest revenue		2037
Feb 28 2021	cash	32000
	Investment in long term debt securities		32000
	[Being bond matured ]