tanner-UNF Corporation acquired as a long-term investment $340 million of 6.0% b
ID: 2484743 • Letter: T
Question
tanner-UNF Corporation acquired as a long-term investment $340 million of 6.0% bonds, dated July 1, on July 1, 2016. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 9% for bonds of similar risk and maturity. Tanner-UNF paid $310.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2016 was $320.0 million. Required: 1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2016 and interest on December 31, 2016, at the effective (market) rate.
Explanation / Answer
To Discount on bond payable A/C 30000000
To Cash A/C 310000000
2.
Cash A/C Dr 10200000
Discount on bond payable A/C Dr 3750000
To Interest income A/C 13950000
Calculation
Coupon for 6 months=340m * 6/100*6/12=10200000
Interest on market value at time of issue=Market value * Market interest rate *6/12=310*9/100*6/12=13950000
The difference between the interest calculated on par value and market value is the discount on bond .
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