Hynes Inc. issued $100 million of 7.25% bonds to yield 7% at 102 with an issue d

Question

Hynes Inc. issued $100 million of 7.25% bonds to yield 7% at 102 with an issue date of January 1, 2016 and maturity date of January 1, 2021. The bond pays annual interest on December 31. Sampson Corp. purchases $2 million of the bonds at issue at a price of 102.

a. Record the issuance and first interest payment for Hynes Inc.

b. Record the purchase and first interest receipt for Sampson Corp.

c. Assume that Sampson Corp. has classified the bonds as available for sale and the market value of the bonds are 103 at December 31. Record the fair value adjustment.

Explanation / Answer

a. Entry for issuance :

Cash Dr $102000000

To Premium on Issue of Bonds $2000000

To Bonds Payable $100000000

(Bond issued at a premium of $2000000)

Entry on Interest payment date:

Interest Expense Dr $6995000

Premium on issue of bonds($200000/5) Dr $400000

To Cash $7395000

b. Entry In books of Sampson for purchase:

Available for Sale Securities Dr $2040000

To Cash $2040000

For interest received:

Cash Dr $145000

To Interest Income $145000

c. Available for Sale Securities Dr $20000

Gain on available-for-sale securities $20000

(Unrealized gain = $2040000 / 102 * 103 = $20000)

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