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Lance Brothers Enterprises acquired $770,000 of 5% bonds, dated July 1, on July 1, 2016, as a long-term investment. Management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Lance Brothers paid $690,000 for the investment in bonds and will receive interest semiannually on June 30 and December 31. Prepare the journal entries (a) to record Lance Brothers’ investment in the bonds on July 1, 2016, and (b) to record interest on December 31, 2016, at the effective (market) rate

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saqib097

Answer:

Cash (2.00% × $770,000) = $15,400

Interest revenue (2.50% × $690,000) = $17,250.

Discount = 770,000 - 690,000 = 80,000

Date                       General Journal                                Debit            Credit

July 1, 2016           Investment in bonds                           770,000

                             Discount on bond investment                                 80,000

                                  Cash                                                                   690,000

Dec 31, 2016          Cash                                                    15,400

                              Discount on bond investment            1850

                              Interest revenue                                                        17,250

The above answer is slightly wrong... the first part is correct but the second part is simply incorrect.

Cash (5.00%/2 × $770,000) = $19,250

Interest revenue (6.0%/2 × $690,000) = $20,700

Discount = 770,000 - 690,000 = 80,000

Date General Journal Debit Credit

July 1, 2016 Investment in bonds 770,000

Discount on bond investment 80,000

Cash 690,000

Dec 31, 2016 Cash 19,250

Discount on bond investment 1,450

Interest revenue 20,700

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