Question

Lance Brothers Enterprises acquired $710,000 of 4% bonds, dated July 1, on July 1, 2021, as a long-term investment. Management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Lance Brothers paid $630,000 for the investment in bonds and will receive interest semiannually on June 30 and December 31.

Answer 1

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.