Question

McWherter Instruments sold $610 million of 10% bonds, dated January 1, on January 1, 2021. The bonds mature on December 31, 2040 (20 years). For bonds of similar risk and maturity, the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Blanton Technologies, Inc., purchased $610,000 of the bonds as a long-term investment. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds issued on January 1, 2021. 2. Prepare the journal entries to record (a) their issuance by McWherter and (b) Blanton's investment on January 1, 2021. 3. Prepare the journal entries by (a) McWherter and (b) Blanton to record interest on June 30, 2021 (at the effective rate). 4. Prepare the journal entries by (a) McWherter and (b) Blanton to record interest on December 31, 2021 (at the effective rate). Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Determine the price of the bonds issued on January 1, 2021. (Enter your answer in whole dollars.) Bond price < Required 1 Required 2 >

Answer 1

McWherter Requirement 1 Interest $30,500,000 x 15.04630 Principal $610,000,000 x 0.09722 Present value (price) of the bonds 458912150 59304200 518216350 Present value of an ordinary annuity of $1: n = 40, i = 6% (Table 4) Present value of $1: n = 40, i = 6% (Table 2) 610000000 x 10% x 0.5 = 30500000 Requirement 2 Cash (price determined above) a/c Discount on bonds (difference) a/c To Bonds payable (face amount) Dr. Dr. 518216350 91783650 610000000 610000 Bond investment (face amount) a/c Dr. To Discount on bond investment (difference) To Cash (0.1% x $518,216,350) 91784 518216 Requirement 3 31092981 Interest expense (6% x $518,216,350) a/c Dr. To Discount on bond investment (difference) To Cash (5% x $610,000,000) 592981 30500000 Dr. Cash (5% x $610,000) a/c Discount on bond investment (difference) a/c Dr. To Interest revenue (6% x $518,216) 30500 593 31093 Requirement 4 31128560 Interest expense (6% x ($518,216,350 +592,981]) a/c Dr. To Discount on bond investment (difference) To Cash (5% x $610,000,000) 628560 30500000 Cash (5% x $610,000) a/c Dr. Discount on bonds (difference) a/c Dr. To Interest revenue (6% x ($518,216 +593]) 30500 629 31129