On January 1,2X13,Soothing Massage Company acquired,as a long-term investment,20 bonds with a face value of $1,000 each.The bonds have a 10-year life,a 10% coupon rate,and pay interest semi-annually every June 30 and December 31.What is the journal entry to be made by Soothing Massage Company on January 1,2X13,if the bonds were purchased at a price to yield 8%?

Question

Quizplus · Accepted Answer

To calculate the price that Soothing Massage Company paid for the bonds, we need to use the present value formula:

PV = C x [1 - (1+r)^-n]/r + FV/(1+r)^n

where PV is the present value or price of the bonds, C is the semi-annual coupon payment ($1,000 x 10%/2 = $50), r is the semi-annual yield rate (8%/2 = 4%), n is the number of semi-annual periods (10 years x 2 = 20), and FV is the face value of the bonds ($1,000).

PV = $50 x [1 - (1.04)^-20]/0.04 + $1,000/(1.04)^20
PV = $937.472995 + $456.3926798
PV = $1,393.865675

Therefore, Soothing Massage Company paid $1,393.87 per bond or $27,877.40 in total (20 bonds x $1,393.87 per bond).

The journal entry to record the purchase of the bonds is:

Investment in Bonds              22,718.30
Cash                                         22,718.30

The investment in bonds is recorded at cost, which is the total amount paid for the bonds including any transaction costs or fees. The difference between the face value of the bonds and the purchase price is the discount or premium which will be amortized over the life of the bonds.

On January 1,2X13,Soothing Massage Company Acquired,as a Long-Term Investment,20 Bonds Investment in Bonds 14,108,10 Cash 14,108,10\begin{array}{lcc}\text { Investment in Bonds } & 14,108,10& \\\quad \text { Cash } & & 14,108,10 \\\end{array} Investment in Bonds Cash ​14,108,10​14,108,10​

On January 1,2X13,Soothing Massage Company Acquired,as a Long-Term Investment,20 Bonds $\begin{array}{lcc}\text { Investment in Bonds } & 14,108,10& \\\quad \text { Cash } & & 14,108,10 \\\end{array}$