Question

Lance Brothers Enterprises acquired $755,000 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 $675,000 for the investment in bonds and will receive interest semiannually on June 30 and December 31. 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer:

Dr  Investment in bonds   $755,000

Cr discount on bonds investment               $80,000

Cr cash                                                          $675,000

December 31:

Dr cash($755,000*4%*6/12)                                                $15,100

Dr discount on bonds investment(difference)                        $1775

Cr bond interest revenue($675,000*5%*6/12)                                      $16,875

Explanation:

The purchase of the bonds at $675,000 while the face value was $755,000 meant that the bonds were acquired at a discount of $80,000($755,000-$675,000),as a result the appropriate entries would be to credit cash with $675,000 paid as well as the discount on investment with $80,000 while the investment in bonds account is debited with face value of $755,000