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.If the bonds were purchased by Soothing Massage Company to yield 12% and were acquired for $17,705.90,what is the journal entry to be made by Soothing Massage Company with respect to interest on June 30,2X13?

Question

Quizplus · Accepted Answer

The journal entry for interest on June 30, 2X13 should include Credit to Interest Revenue for $1,062.35, which is 10% of the face value of $20,000 for one half year, and Debits to Cash for $1,000 and Investment in Bonds for $62.35, which is the discount on the bond purchase calculated as follows:
Purchase price = $1,000 x 20 (number of bonds) x PV factor at 12% for 10 years and semi-annual period = $17,705.90
PV factor at 12% for 10 years and semi-annual period = 1 / (1 + 6%)^(10 x 2) x [(1 + 6%)^(10 x 2) - 1] / 6% = 6.1445
Discount on bond purchase = Face value - Purchase price = $20,000 - $17,705.90 = $2,294.10
Discount on bond purchase per bond = $2,294.10 / 20 = $114.71
Discount on bond purchase for one half year = $114.71 / 2 = $57.35
Investment in Bonds = Face value - Present value = $20,000 - [$1,000 x 20 x 1 / (1 + 6%)^(10 x 2)] = $17,937.65
Investment in Bonds per bond = $17,937.65 / 20 = $896.88
Investment in Bonds for one half year = $896.88 x 6% = $53.53
Thus, the total amount debited to Investment in Bonds is $62.35 ($53.53 + $8.82), which is the sum of amortization of bond discount ($8.82 = $57.35 - $48.53) and interest expense ($53.53).