McWherter Instruments sold 500 million of 8 bonds dated Janu

McWherter Instruments sold $500 million of 8% bonds, dated January 1, on January 1, 2018. The bonds mature on December 31, 2037 (20 years). For bonds of similar risk and maturity, the market yield was 10%. Interest is paid semiannually on June 30 and December 31. Blanton Technologies, Inc., purchased $500,000 of the bonds as a long-term investment. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price of the bonds issued on January 1, 2018.
2. Prepare the journal entries to record (a) their issuance by McWherter and (b) Blanton\'s investment on January 1, 2018.
3. Prepare the journal entries by (a) McWherter and (b) Blanton to record interest on June 30, 2018 (at the effective rate).
4. Prepare the journal entries by (a) McWherter and (b) Blanton to record interest on December 31, 2018 (at the effective rate).
?

Solution

Par value of Bonds 500,000,000 Stated rate of interest 8% Semi annual cash interest 20,000,000 (500000,000*8%*6/12) Annuity present value factor for 40 periods 17.1591 PVF at 5% for 40th periiod 0.142 Present value of interest 343182000 Present value of maturity 71000000 ISSUE price 414182000 Amort Chart Date Cash Interest Interest Discount Unamortized Carrying Expense Amortized Discount Value of bonds 01.01.18 85818000 414182000 30.06.18 20,000,000 20709100 709100 85108900 414891100 31.12.18 20,000,000 20744555 744,555 84,364,345 415,635,655 Journal entries in Mc Wherter Date Accounts title and explanation Debit $ Credit $ Jan 1 2018 Cash account Dr. 414182000 Discount on bonds payable Dr. 85818000      Bonds payable Account 500,000,000 june 30 2018 Interest expense Account Dr. 20709100      Cash account 20,000,000      Discount on bonds payable 709,100 Ddec31 2018 Interest expense Account Dr. 20744555      Cash account 20,000,000      Discount on bonds payable 744,555 Journal entries for Blanton Date Accounts title and explanation Debit $ Credit $ Jan 1 2018 Investment in Mc wherter Bonds Dr. 500,000     Cash account 414182      Discount on Investment 85,818 June 302018 Cash account Dr. 20000 Discount on investment Dr. 709     Interest revenue 20709 Dec31 2018 Cash account Dr. 20000 Discount on investment Dr. 745     Interest revenue 20745