On January 1, 2018, your company purchases a bond investment. The facts are as f
ID: 2558339 • Letter: O
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
Explanation / Answer
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
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
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