Lamar Insurance purchased $50,000 of 4.0% LTP bonds on January 1, 2016, at a pri
ID: 2555386 • Letter: L
Question
Lamar Insurance purchased $50,000 of 4.0% LTP bonds on January 1, 2016, at a price of 48 when the market rate of interest was 10%. Lamar intends to hold the bonds until their maturity date of January 1, 2036. The bonds pay interest semiannually on each January 1 and July 1. Record the initial purchase of the bonds by Lamar on January 1, 2016, and the receipt of the interest on the first interest payment date of July 1, 2016. (Record debits first, then credits. Exclude explanations from any journal entries.) First, record the initial purchase of the bonds on January 1, 2016. Journal Entry Date Accounts Debit Credit Jan Now record the receipt of the interest on the first interest payment date of July 1, 2016. Journal Entry Date Accounts Debit Credit Jul Choose from any list or enter any number in the input fields and then continue to the next question.Explanation / Answer
Initial purchase of the bonds on 1st January 2016
Assuming that $50,000 bonds includes 500 bonds with face value of $100 each
Now, Lamar insurance purchased these bonds at a discount price of $48 each bond.
So, the total amount invested by Lamar insurance = 500 bonds * $48 = $24,000
Therefore journal entry for recording purchase of bonds on 1st January 2016 will be,
Investments in bonds A/c Debit $24,000
To, Bank/Cash A/c credit $24,000
Note: The bonds have been issues at a discount and it seems to be reasonable owing to the fact that the market interest rate is 10% , whereas the bonds have a interest rate of 4% just which is 40% of the market interest rate. Because of this reason, this bond is trading in the market at 48% of its face value (selling at $48 per bond with face value of $100).
Interest entry on the first interest payment date of 1st July 2016
Interest amount to be received on 1st July 2016 = ($50,000 *4%)*6/12 = $1,000
Since interest is paid semi annually, therefore we have taken interest for 6 months.
Journal entry will be:
Bank A/c Debit $1,000
To, Interest on bonds A/c Credit $1,000
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