Answer:
The question is missing the below requirement:
Prepare the journal entries (a) to record Lance Brothers’ investment in the bonds on July 1, 2021, and (b) to record interest on December 31, 2021, at the effective (market) rate:
The journal entries upon acquisition of the bond is shown thus:
DR Financial asset $710000
CR Discount on financial asset $80000
CR Cash $630000
The journal entry to record the interest on 31 December 2021 is as follows:
The interest is calculated on the par value value;
Cash $710000*4%*6/12 $14200
Discount on bond $1550
Interest revenue $630000*5%*6/12 $15750
Explanation:
The investment is recorded at the par value in financial asset account but the cash paid is lower,which means the issuer issued the bond at discount ,hence the discount of $80000 is recorded.
Also the discount is considered when the interest was calculated as the effective interest is lower than the coupon,which means the discount gotten earlier was partial interest received in advance.
