Question

Lance Brothers Enterprises acquired $755,000 of 4% bonds, dated July 1, on July 1, 2021, as a long-term investment. Management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Lance Brothers paid $675,000 for the investment in bonds and will receive interest semiannually on June 30 and December 31.

Prepare the journal entries (a) to record Lance Brothers' investment in the bonds on July 1, 2021, and (b) to record interest on December 31, 2021, at the effective (market) rate. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet < 2 > Record Lance Brothers' investment in the bonds on July 1, 2021. Record interest on December 31, 2021, at the effective (market) rate.

Answer 1

A. July 1, 2021

Dr Investment in bonds755,000

Cr Discount on bondinvestment80,000

Cr Cash 675,000

B. December 31, 2021

Dr Cash 25,100

Cr Discount on bond investment 1,775

Cr Interest revenue16,875

Step-by-step explanation:

A. Preparation of the journal entries to record Lance Brothers' investment in the bonds on July 1, 2021,

July 1, 2021

Dr Investment in bonds755,000

Cr Discount on bondinvestment80,000

(755,00-675,000)

Cr Cash 675,000

(To record Lance Brothers' investment in the bonds)

B. Preparation of the journal entries to record interest on December 31, 2021, at the effective (market) rate

December 31, 2021

Dr Cash 25,100

(4.00%/2 × $755,000)

Cr Discount on bond investment 1,775

(25,100-16,875)

Cr Interest revenue16,875

(5%2 × $675,000)

(To record interest at the effective)