Exercise 144 Investor effective interest LO142 The Bradford

Exercise 14-4 Investor; effective interest [LO14-2] The Bradford Company issued 8% bonds, dated January 1, with a face amount of $75 million on January 1, 2018 to Saxton-Bose Corporation. The bonds mature on December 31, 2037 (20 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (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 . to 3. Prepare the journal entry to record the purchase of the bonds by Saxton-Bose on January 1, 2018, interest revenue on June 30, 2018 and interest revenue on December 31, 2018 (at the effective rate). (Enter your answers in whole dollars. If no entry is required for a transaction/event, select \"No journal entry required\" in the first account field.) View transaction list Journal entry worksheet Record the purchase of the bonds by Saxton-Bose. Note: Enter debits before credits Date General Journal Debit Credit January 01, 2018

Solution

semiannual interest = 75,000,000 * .08*6/12 = 3000000

semiannual months = 20 *2 =40

semiannual yield = 10*6/12 = 5%

Issue price =[PVAD 5%,40*Interest ]+[PVF 5%,40*Face value

             = [17.15909*3,000,000] + [.14205*75,000,000]

               = 51,477,270+ 10,653,750

            = 62,131,020

30 June 2018

**carrying value after first semiannual payment = 62131020+106551 discount amortised =62237571

Date	Account	Debit	credit
1jan 2018	Investment in Bond /Bond receivable	75,000,000
	Discount on Bond receivable		12,868,980
	cash		62,131,020
	[being investment made]
30 June 2018	cash	3,000,000
	Discount on bond receivable	106551
	Interest revenue [62,131,020 *.05]		3106551
31 dec 2018	cash	3000000
	Discount on bond receivable	111879
	Interest revenue [62237571*.05]		3111879