Question

On January 1, 2019, Mark Corporation purchased bonds with a face value of $500,000 for $475,413.60. The bonds are due December 31, 2021, carry a 10% stated rate, and were purchased to yield 12%. Interest is payable semiannually on June 30 and December 31. On January 1, 2021, in contemplation of a major acquisition, one-fourth of the bonds were sold for $127,000. The remainder were held until maturity.
Required:
a. Prepare journal entries to record the purchase of the bonds, each interest payment, the partial sale of the invest ment on January 1, 2021, and the retirement of the bond issue on December 31, 2021

Answer 1

Answer:

Debt Securities         500,000 debit

           cash                 475,414 credit

           discount on debt Securities  24,586 credit

--to record purchase of bonds--

cash                                          25,000 debit

discount on debt Securities 3,524.82 debit

          Interest revenue                  28524.82 credit

--to record first interest coupon collection--

478,938 x 0.12/2 = 28736.31 revenue

cash 25000

amortization 3736.31

cash                                          25,000 debit

discount on debt Securities   3,736.31 debit

          Interest revenue                   28,736.31 credit

--to record second interest coupon collection--

cash                                        127,000

discount on debt securities 4.331,25

     debt securities                            125,000

     short-capital gain                            6,331.25

--to record sale of bonds---

after this and the subsequent interest payment, the discount is write-off entirely and in maturity we record:

cash 375,000 debit

    debt securities    375,000 credit

--to record maturity of the bonds on Dec 31th 2021--

Explanation:

procceds         475,414

face value    500,000

discount              -24,586

interest will be calcualte as the result of the carying value times the market rate:

475,414 x 0.12/2 = 28524.82

cash inflow: 500,000 x 10% / 2 = 25,000

amortization on discount: 3,524.82

second will be the same procedure:

478,938 x 0.12/2 = 28736.31 revenue

cash 25000

amortization 3736.31

partial sale of 1/4 of the bond:

500,000 / 4 = 125,000

500,000 discount outstanding of 17.325‬

125,000 has a discount of 4.331,25

value of the bonds sold:

125,000 - 4331.25 = 120.668,75‬

sale at 127,000

short capital-gian on sale: 6.331,25‬