Question

On April 1, 2021, Western Communications, Inc., issued 12% bonds, dated March 1, 2021, with face amount of $33 million. The bonds sold for $32.3 million and mature on February 28, 2024. Interest is paid semiannually on August 31 and February 28. Stillworth Corporation acquired $33,000 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.
1. Prepare the journal entries to record (a) issuance of the bonds by Western and (b) Stillworth’s investment on April 1, 2018.
2. Prepare the journal entries by both firms to record all subsequent events related to the bonds through maturity.

Answer 1

Answer:

western

Cash                                  32,300,000 debit

discount on bonds payable 700,000 debit

                bonds payable                   33,000,000 credit

interest expense    2,096,666.67‬     debit

      discount on bonds payable    116,666.67 credit

     cash                                          1,980,000 credit

(repeat for the 6 interest payment)

at maturity:

bonds payable 33,000,000 debit

         cash                   33,000,000 credit  

stillworth

Investment-Debt securities 32,300 debit

Discount on Debt securities    700 debit

                     cash                             33,000 credit

interest expense    2,096.67‬     debit

      discount on bonds payable    116.67 credit

     cash                                          1,980 credit

(repeat for the 6 interest payment)

at maturity:

cash      33,000 debit

       Investment-Debt securities   33,000 credit

Explanation:

western:

we subtract the face value from the proceeds to determiante how much is the discount

stillworth

As they were acquired as long erm investment we will record using an amortization method as they will be held until maturity. If not, we will simply use face value

amortization of the bonds:

The total payment are 6

so we divide the 700,000 among 6 to know the amortization per payment:

700,000/6 = 116,666.67

cash outlay:

33,000,000 x 0.12/2 = 1,980,000

interest expense will be the sum of both concepts:

1,980,000 + 116,666.67 = 2,096,666.67‬

for the 700 it will be:

700/6 = 116.67

then 33,000 x 0.06 = 1,980

1,980 + 116.67 = 2,096.67 interest expense.