Question

Universal Foods issued 12% bonds, dated January 1, with a face amount of $155 million on January 1, 2021 to Wang Communications. The bonds mature on December 31, 2035 (15 years). The market rate of interest for similar issues was 14%. Interest is paid semiannually on June 30 and December 31. (FV of $1. PV of $1. EVA 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 entries to record the purchase of the bonds by Wang Communications on January 1, 2021, interest revenue on June 30, 2021 and interest revenue on December 31, 2028. (Round final answers to the nearest whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list

Answer 1

Journal entries for Wang communications:

Date	Account titles/Details	Debit	Credit
Jan 1, 2021	Investment in Bonds issued by Universal food A/c	$        155,000,000
	Discount on Investment in Bonds issued by Universal food A/c		$          19,291,300
	Cash A/c		$        135,708,700
	(To record Investment in Bonds issued by Universal food)
June 30, 2021	Cash A/c	$             9,300,000
	Discount on Investment in Bonds issued by Universal food A/c	$                643,043
	Interest revenue A/c		$             9,943,043
	(To account for interest revenue)
Dec 31, 2028	Cash A/c	$             9,300,000
	Discount on Investment in Bonds issued by Universal food A/c	$                643,043
	Interest revenue A/c		$             9,943,043
	(To account for interest revenue)

Workings:

Interest revenue = $155,000,000 * 12%/2 =$9,300,000

PV of bond redemption value = $155,000,000 * PVF 7%,30 = $155,000,000*0.131=$20,305,000

PV of interest received = $9,300,000 * PVIFA 7%,30 periods = $9,300,000*12.409 = $115,403,700

PV of bonds issued = $20,305,000+$115,403,700 = $135,708,700

Discount = $155,000,000-$135,708,700 = $19,291,300

Amortized discount = $19,291,300/30 = $643,043