Question

On April 1, 2021, Western Communications, Inc., issued 12% bonds, dated March 1, 2021, with face amount of $35 million. The bonds sold for $34.3 million and mature on February 28, 2024. Interest is paid semiannually on August 31 and February 28. Stillworth Corporation acquired $35,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31, and both firms use the straight-line method. Required: 1. Prepare the journal entries to record (a) issuance of the bonds by Western and (b) Stillworth’s investment on April 1, 2021. 2. Prepare the journal entries by both firms to record all subsequent events related to the bonds through maturity.

Answer 1

a)	In the Books of Western Communication Inc.
	Journal Entries to record Issuance of Bonds by Western Communication Inc.
	Sr no	Date	Particulars	Dr/Cr	Dr Amount ($ In Million)	Cr Amount ($ In Million)
	1	01-Apr-21	Bank A/c	Dr	34.30
			Discount of Issue of Bonds A/c [$ 35 million - $ 34.3 million]	Dr	0.70
			To 12% Bonds, dated March 1, 2021 A/c			35.00
			(Being Issuance of Bonds by Western Communication Inc. Dated March 1, 2021, having face value of Rs $35 milliion)
b)	In the Books of Stillworth Corporation
	Journal Entries to record Investments made by Stillworth Corporation
	Sr no	Date	Particulars	Dr/Cr	Dr Amount (In $)	Cr Amount (In $)
	1	01-Apr-21	Investment in 12% Bonds, dated March 1, 2021	Dr	35,000.00
			To Bank A/c			34,300.00
			To discount on issue of shares A/c(Income)			700.00
			(Being Investment made in 12% Bonds, Dated March 1, 2021 Issued by Western Communication Inc)
c)	In the Books of Western Communication Inc.
	Journal Entries to record Interest expense and redemption at maturity date
	Sr no	Date	Particulars	Dr/Cr	Dr Amount ($ In Million)	Cr Amount ($ In Million)
	1	31-Aug-21	Interest Expense A/c	Dr	2.10
			To Bank A/c			2.10
			(Being Interest on bonds issue paid to the Unit holder's)
			[$ 35 million X 12% X 6m/12m]*
	2	28-Feb-22	Interest Expense A/c	Dr	2.10
			To Bank A/c			2.10
			(Being Interest on bonds issue paid to the Unit holder's)
			[$ 35 million X 12% X 6m/12m]*
	3	31-Aug-22	Interest Expense A/c	Dr	2.10
			To Bank A/c			2.10
			(Being Interest on bonds issue paid to the Unit holder's)
			[$ 35 million X 12% X 6m/12m]*
	4	28-Feb-23	Interest Expense A/c	Dr	2.10
			To Bank A/c			2.10
			(Being Interest on bonds issue paid to the Unit holder's)
			[$ 35 million X 12% X 6m/12m]*
	5	31-Aug-23	Interest Expense A/c	Dr	2.10
			To Bank A/c			2.10
			(Being Interest on bonds issue paid to the Unit holder's)
			[$ 35 million X 12% X 6m/12m]*
	6	28-Feb-24	Interest Expense A/c	Dr	2.10
			To Bank A/c			2.10
			(Being Interest on bonds issue paid to the Unit holder's)
			[$ 35 million X 12% X 6m/12m]*
	7	28-Feb-24	12 % Bonds, Dated March 1, 2021 A/c	Dr	35.00
			To Bank A/c			35.00
			(Being 12% Bonds Dated March 1,2021 redeemed at maturity)
	*	In Interest Expense calculation, 6months is taken because the Interest on bonds is paid semiannually by the company.
	Note	Interest is always calculated on Face Value and not on Market Value
c)	In the Books of Stillworth Corporation
	Journal Entries to record Interest expense and Income at maturity
	Sr no	Date	Particulars	Dr/Cr	Dr Amount (In $)	Cr Amount (In $)
	1	31-Aug-21	Bank A/c	Dr	2,100
			To Interest Income A/c			2.10
			(Being Interest on bonds issue recieved by the Unit holder)
			[$ 35,000 X 12% X 6m/12m]*
	2	28-Feb-22	Bank A/c	Dr	2,100
			To Interest Income A/c			2.10
			(Being Interest on bonds issue recieved by the Unit holder)
			[$ 35,000 X 12% X 6m/12m]*
	3	31-Aug-22	Bank A/c	Dr	2,100
			To Interest Income A/c			2.10
			(Being Interest on bonds issue recieved by the Unit holder)
			[$ 35,000 X 12% X 6m/12m]*
	4	28-Feb-23	Bank A/c	Dr	2,100
			To Interest Income A/c			2.10
			(Being Interest on bonds issue recieved by the Unit holder)
			[$ 35,000 X 12% X 6m/12m]*
	5	31-Aug-23	Bank A/c	Dr	2,100
			To Interest Income A/c			2.10
			(Being Interest on bonds issue recieved by the Unit holder)
			[$ 35,000 X 12% X 6m/12m]*
	6	28-Feb-24	Bank A/c	Dr	2,100
			To Interest Income A/c			2.10
			(Being Interest on bonds issue recieved by the Unit holder)
			[$ 35,000 X 12% X 6m/12m]*
	7	28-Feb-24	Bank A/c	Dr	35,000
			To 12 % Bonds, Dated March 1, 2021 A/c			35,000
			(Being 12% Bonds Dated March 1,2021 redeemed at maturity)