Question

On January 1, 2018, your company purchases a bond investment. The facts are as follows: Face amount $820,000 Cost of bonds $780,913 Stated rate 12% Term 3 years Market rate 14% Interest is recorded semi-annually June 30, 2018. Record the entry for the semi-annual interest revenue.

Date Account Debit Credit 6/30:

Cash

Discount on Bonds Investment

Interest Revenue

December 31, 2018 Record the entry for the semi-annual interest revenue. Date Account Debit Credit 12/31

Cash

Discount on Bonds Investment

Interest Revenue

Answer 1

Solution:

First of all we need to prepare the discount amortization table for 2 period of interest revenue

Schedule of Amortization of Bond DISCOUNT (Effective Rate Method)
Payment intervals	Date	Interest Revenue (Carrying Value at the beginning of period x Market Interest Rate 14%*1/2 half yearly)	Cash Receipt (Face Value of the Notes $820,000 x Coupon Rate 12%*1/2 half yearly)	Discount Amortization (Interest Expense - Cash Paid)	Unamortized Bond Discount	Par Value of Bonds Payable	Book Value (Par Value - Balance of Unamortized Bond Discount)
0	Jan.1, 2018				$39,087	$820,000	$780,913
1	June.30, 2018	$54,664	$49,200	$5,464	$33,623	$820,000	$786,377
2	Dec.31, 2018	$55,046	$49,200	$5,846	$27,777	$820,000	$792,223

                                          

Now, we can record journal entries

Date	Account Titles and Explanation	Debit	Credit
June.30, 2018	Cash	$49,200
	Discount on Bonds Investment	$5,464
	Interest Revenue		$54,664
Dec.31, 2018	Cash	$49,200
	Discount on Bonds Investment	$5,846
	Interest Revenue		$55,046

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