Answer:
Initial purchase of the bonds on 1st January 2016
Assuming that $60,000 bonds includes 600 bonds with face value of $100 each
Now, Lamar insurance purchased these bonds at a discount price of $159.5 each bond.
So, the total amount invested by Lamar insurance = 600 bonds * $159.5 = $95,700
Therefore journal entry for recording purchase of bonds on 1st January 2016 will be,
Investments in bonds A/c Debit $95,700
To, Bank/Cash A/c credit $95,700
Note: The bonds have been issues at a discount and it seems to be reasonable owing to the fact that the market interest rate is 6% , whereas the bonds have a interest rate of 14%.
Interest entry on the first interest payment date of 1st July 2016
Interest amount to be received on 1st July 2016 = ($60,000 *14%)*6/12 = $4.200
Since interest is paid semi annually, therefore we have taken interest for 6 months.
Journal entry will be:
Bank A/c Debit $4,200
To, Interest on bonds A/c Credit $4,200
