Question

reise 8 On January 1, Y1, Whittington Stoves issued $800 million of its 8% bonds for $736 flion. The bonds were priced to yield 10%. Interest is payable semianmully on June 30 and pecember 31. Whittington records interest at the effective rate and elected the option to report these bonds at their fair value. One million dollars of the increase in fair value was due to a change in the general (risk-free) rate of interest. On December 31,Y1, the fair value of the bonds was $752 million as determined by their market value on the NYSE. Required: Prepare the journal entry to record interest on June 30,Y1 (the first interest payment).

Answer 1

To record interest on June 30,Y1 (the first interest payment), the journal entry would be: Interest Expense 40,000 and Cash 40,000.

Step-by-step explanation:

To record interest on June 30, Y1 (the first interest payment), the journal entry would be:

Interest Expense 40,000

Cash 40,000

The bonds were issued at a discount, meaning that they were sold for less than their face value. The discount is amortized over the life of the bond and recorded as interest expense. In this case, the discount on the bonds is $64 million ($800 million - $736 million), and the bonds have a 4-year term, with interest payable semiannually.

The total discount of $64 million needs to be allocated over the 8 interest periods (4 years x 2 semesters per year). Therefore, the amortization of the discount for each interest period is $8 million ($64 million / 8). The first interest payment would be $8 million, which is $800 million x 8% x 1/2.

The journal entry debits the Interest Expense account for $40,000 and credits the Cash account for $40,000, reflecting the payment of the first semi-annual interest.