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McWherter Instruments sold $410 million of 10% 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 12%. Interest is paid semiannually on June 30 and December 31. Blanton Technologies, Inc., purchased $410,000 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).

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Answer:

Assume the face value of the bond is $1,000

1. Price of bond issued is: $849.54 or it is selling at 0.84954 comparing to par;

2.

(a)

Dr Cash                              348,311,400

Dr Discount on bond         61,688,600

Cr Bond Payable               410,000,000

(to record bond issuance from McWherter)

(b)

Dr Investment on Bond             348,311

Cr Cash                                      348,311

(to record bond investment by Blanton)

3.

(a)

Dr Interest Expenses                  20,898,684

Cr Discount on Bond                   398,684

Cr Cash                                        20,500,000

(To record McWheter interest expenses as at June 30 2018)

(b)

Dr Investment on Bond                 399

Dr Cash                                           20,500

Cr Interest Revenue                      20,899

(to record Blanton investment as at 30 Jun 2018)

4.

(a)

Dr Interest Expenses                  20,922,605

Cr Discount on Bond                   422,605

Cr Cash                                        20,500,000

( to record McWheter interest expenses as at Dec 31 2018)

(b)

Dr Investment on Bond                 423

Dr Cash                                           20,500

Cr Interest Revenue                      20,923

(to record Blanton investment as at 31 Dec 2018)

Explanation:

1.

Price is calculated as:

(1,000 x 5%) / 6% * [ 1 - 1.06^(-40) ] + 1,000/1.06^40 = $849.54

2.

(a) Bond account is to be recorded at its face value or $410,000,000 Credit

    Cash receipt = 410,000,000 x 0.84954 = $348,311,400 Debit

    The difference is to be debited in Discount on Bond $61,688,600

(b) Investment is recorded equal to the amount of cash spend on $410,000 face value of the bond which is 410,000 x 0.84954 = $348,311

3.

(a) Cash paid out for Interest is 410,000,000 x 5% = 20,500,000 (Cr)

    Interest expenses is debited at ( 410,000,000 - 61,688,600) * 6% = $20,898,684

    The difference is to be Credited into Discount on Bond $398,684

(b) Cash receipt from coupon is 410,000 x 5% = 20,500;

     Interest revenue is 348,311 x 6% = $20,899 Debited

     The difference is debited Investment on Bond $399

4.

(a) Cash paid out for Interest is 410,000,000 x 5% = 20,500,000 (Cr)

    Interest expenses is debited at ( 410,000,000 - 61,688,600 + 398,684) * 6% = $20,922,605

    The difference is to be Credited into Discount on Bond $422,605

(b) Cash receipt from coupon is 410,000 x 5% = 20,500;

     Interest revenue is (348,311+399) x 6% = $20,923 Debited

     The difference is debited Investment on Bond $423

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