Question

On April 1, 2018, Western Communications, Inc., issued 12% bonds, dated March 1, 2018, with face amount of $44 million. The bonds sold for $43.3 million and mature on February 28, 2021. Interest is paid semiannually on August 31 and February 28. Stillworth Corporation acquired $44,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31, and both firms use the straight-line method. Prepare the journal entries to record (a) issuance of the bonds by Western and (b) Stillworth's Investment on April 1, 2018

Answer 1

Answer:

cash                43,300,000 debit

discount on BP 1,  140,000 debit

   bonds payable              44,000,000 credit

   interest payable                 440,000 credit

-- to record issuance of BP --

investment on bonds 44,000 debit

            cash                   43,050 credit

            discount on bonds 950 credit

-- to record purchase of bonds --

Explanation:

Face amount: 44,000,000

interest payable   440,000

issued at          43,300,000

discount               1,140,000

accrued interest: 44,000,000 x 12% / 12 = 440,000

The company issued the bonds for less than his face value. The bonds have a discount.

carrying value of the bonds at August 31th

1,140,000 / 6 = 190,000 amortization

1,140,000 - 190,000 = 950,000

Carrying value  44,000,000 - 950,000 = 43,050,000

Investment: 44,000 in bonds

the bonds will also have a discount so it were purchase at 43,050

44,000,000 --> 43,050,000

       44,000 --> 43,050