Question

Lance Brothers Enterprises acquired $515,000 of 3% bonds, dated July 1, on July 1, 2018, as a long-term investment. Management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Lance Brothers paid $435,000 for the investment in bonds and will receive interest semiannually on June 30 and December 31. Prepare the journal entries (a) to record Lance Brothers’ investment in the bonds on July 1, 2018, and (b) to record interest on December 31, 2018, at the effective (market) rat

Answer 1

Answer:

1st July,2018  

investment in bond     $515,000 ( debit)

discount on bond investment   $80000 (credit)

Lance Brothers paid   $435,000 ( credit)

31st, December 2018

cash     $7725 (debit)

discount on bond   975 ( debit )

interest revenue is   $8700 (credit )

Explanation:

Given data

investment = $515,000

bond = 3%

interest rate = 4%

Lance Brothers paid = $435,000

to find out

investment in the bonds on July 1 and interest on December 31

solution

we know here

on 1st July,2018

investment in bond that is = $515,000 ( debit)

and we know Lance Brothers paid  =  $435,000 ( credit)

so discount on bond investment = 515000 - 435000 = $80000 (credit)

and

on 31st, December 2018

cash will be =  investment in bond ×  3% /2

cash = 515,000 ×  3% /2

cash =  15450 /2 = $7725 (debit)

interest revenue =  Lance Brothers paid × 4% / 2  

interest revenue = 435,000 × 4% / 2  

interest revenue is 17400 /2 = $8700 (credit )

so and discount on bond = interest - cash

discount on bond = 8700 - 7725 = 975 ( debit )