Assume that on September 30, 2014, Wentex Inc. paid 97 for 5.0% bonds of Reynold
ID: 2455764 • Letter: A
Question
Assume that on September 30, 2014, Wentex Inc. paid 97 for 5.0% bonds of Reynold's corporation as a long-term held to maturity investment. The maturity value of the bonds will be $46,000 on September 30, 2019. The bonds pay interest on March 31 and September 30.
1. What method should Wentex use to account for its investment in the bonds?
2. Using the straight-line method of amortizing the discount on bonds, journalize all of Wentex's transactions on the bonds for 2014.
3. Show how Wentex would report everything related to the bond investment on its balance sheet at December 31, 2014.
Explanation / Answer
Date of purchase of bonds by Wintex Inc = 30-sep-2014
amount paid oer bond= 97(Assuming cum - interest)
Assume face value of bond = 100
Interest as on 30-sep-2014= 100*5%*6/12 = 2.5
Deducting pre-acquisition interest from cost of purchase of bond= 94.5
Let number of bonds purchased= x
total investment amount= 94.5 x
total interest on bonds= 2.5 x
2.5 x (cummulative Present value factor for 11 years @ 2.5% per half year)=46000
2.5 x (9.5142)= 46000
x= 1934 bonds
Journal entries:
a)Investment in bondsA/c Dr 182763
to Cash 182763
b) Investment in bonds a/c Dr 4717
to Interest Income 4717
c) Interst Income 4717
to Profit & Loss A/c 4717
Balance Sheet
Liabilities Assets Investment in bonds 187480 (182763+4717) Profit & Loss 4717 cash -182763 4717 4717