Lance Brothers Enterprises acquired $755,000 of 4% bonds, dated July 1, on July

Question

Lance Brothers Enterprises acquired $755,000 of 4% bonds, dated July 1, on July 1, 2016, 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, 2016, and (b) to record interest on December 31, 2016, at the effective (market) rate.

Explanation / Answer

Bond Face vAlue              755,000 Purchase value              675,000 Interest rate 4% Market Rate 5% Cash Interest Interest Income at effective rate Amortization Book Value Dec 31.2016.                                      15,100.00                16,875                             1,775                        676,775 Journal Entry Date Account title Dr $ Cr $ Jul 1.2016 Cash                         675,000 Investment in Bond              675,000 Dec31. 2016. Cash                15,100 Investment in Bond                   1,775 Interest Income                     16,875.00 ( Cash receipt of interest and amorization of discount at effective market rate)

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