Question

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).

Answer 1

Price of Bond issued on 01/01/2018:

All Figures in $ million

Year	Cash Outflow	Nature	PVIF/PVIFA @ 5% semiannualy	PV of Cash Outflow
1-20	20	Interest Payment	17.1591	343.18
20	500	Face Value Redemption	0.1420	71.02
			Total	414.20

Bond Amortisation Schedule:

Half Year	Bond Value	Interest Expense	Interest Payment	Ending Value of Bond
1	414.20	20.71	20.00	414.91
2	414.91	20.75	20.00	415.66
3	415.66	20.78	20.00	416.44
4	416.44	20.82	20.00	417.27
5	417.27	20.86	20.00	418.13
6	418.13	20.91	20.00	419.04
7	419.04	20.95	20.00	419.99
8	419.99	21.00	20.00	420.99
9	420.99	21.05	20.00	422.04
10	422.04	21.10	20.00	423.14
11	423.14	21.16	20.00	424.29
12	424.29	21.21	20.00	425.51
13	425.51	21.28	20.00	426.78
14	426.78	21.34	20.00	428.12
15	428.12	21.41	20.00	429.53
16	429.53	21.48	20.00	431.01
17	431.01	21.55	20.00	432.56
18	432.56	21.63	20.00	434.18
19	434.18	21.71	20.00	435.89
20	435.89	21.79	20.00	437.69
21	437.69	21.88	20.00	439.57
22	439.57	21.98	20.00	441.55
23	441.55	22.08	20.00	443.63
24	443.63	22.18	20.00	445.81
25	445.81	22.29	20.00	448.10
26	448.10	22.41	20.00	450.51
27	450.51	22.53	20.00	453.03
28	453.03	22.65	20.00	455.68
29	455.68	22.78	20.00	458.47
30	458.47	22.92	20.00	461.39
31	461.39	23.07	20.00	464.46
32	464.46	23.22	20.00	467.68
33	467.68	23.38	20.00	471.07
34	471.07	23.55	20.00	474.62
35	474.62	23.73	20.00	478.35
36	478.35	23.92	20.00	482.27
37	482.27	24.11	20.00	486.38
38	486.38	24.32	20.00	490.70
39	490.70	24.54	20.00	495.24
40	495.24	24.76	520.00	-

Answer 2

a.Bond Issuance by McWherter

01-01-2018	Bank	Dr	414.20
	Discount on Bond	Dr	85.80
	Bond Payable	Cr		500

b. Blaton's Investment on 01-01-2018

01-01-2018	Investment in Bond	Dr	500
	Discount on Bond	Cr		85.80
	Bank	Cr		414.20

Answer 3

a. Interest Expense & discount amortiation - McWherter

30-06-2018	Interest Expense	Dr	20.71
	Discount on Bond	Cr		0.71
	Bank	Cr		20.00

b. Interest Income by Blaton

30-06-2018	Bank	Dr	20.00
	Discount on Bond	Dr		0.71
	Interest Income	Cr		20.71

Answer 4

a. Interest Expense by McWherter

31-12-2018	Interest Expense	Dr	20.75
	Discount on Bond	Cr		0.75
	Bank	Cr		20

Interest Income by Blaton

30-06-2018	Bank	Dr	20
	Discount on Bond	Dr	0.75
	Interest Income	Cr		20.75