Exercise 14-4 Investor; effective interest [LO14-2)] The Bradford Company issued

Question

Exercise 14-4 Investor; effective interest [LO14-2)] The Bradford Company issued 10% bonds, dated January 1, with a face amount of $80 million on January 1, 2018 to Saxton-Bose Corporation. The bonds mature on December 31, 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31, (FV of $1, PVof$1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. 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. Round your answers to the nearest whole dollar. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

Computation of issue price: Year Cashflow Discount Factor @ 6% 1 to 20 4000000 11.4699 45879600 (80000000*10%*1/2) 20 80000000 0.311805 24944378.15 Issue price 70823978.15 Journal entries: Date General Journal Debit Credit 2018 Jan 1. Bond investment 80000000 Discount on bond investment 9176022 Cash 70823978 (Purchase of bonds) June 30. Cash (80000000*10%*1/2) 4000000 Discount on bond investment 249439 Interest revenue (70823978*12%*1/2) 4249439 (Interest income earned) Dec 31. Cash (80000000*10%*1/2) 4000000 Discount on bond investment 264405 Interest revenue (70823978+249439)*12%*1/2 4264405 (Interest income earned)

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