Question

Rahman Insurance purchased $50,000 of 8% DMH bonds on January 1, 2018 at a price of 86 when the market rate of interest was 12%. Rahman intends to hold the bonds until their maturity date of January 1, 2023. The bonds pay interest semiannually on each January 1 and July 1. Record the initial purchase of the bonds by Rahman on January 1, 2018 and the receipt of the interest on the first interest payment date of July 1, 2018.

How would I enter this in a Journal Entry?

a. Record the initial purchase of the bonds on Jan. 1, 2018

b. Record the receipt of the interest on the first interest payment date of July 1, 2018

Answer 1

a) Journal entry for initial purchase of bonds :

Jan 1 2018.

Investment in 8% DMH bonds a/c    Dr $43,000

To Cash a/c $43,000

[Since market interest rate was higher than coupon rate (12% > 8%) Rahman purchased bond at $86 instead of $100 per bond. Therefore the total cost incurred was the price paid for bonds i.e. ($50,000/$100)*86 = $43,000]

b)Journal entry for receipt of first interest :

July 1 2018

Cash a/c Dr $2,000

To interest received on bonds a/c $2,000

[Even though Rahman bought the bonds at $43,000 instead of $50,000, the interest is received on the face value of the bond i.e. $50,000. Therefore interest received for 6 months would be ($50,000*8%)*6/12 = $2,000].