Question

On April 1, 2021, Western Communications, Inc., issued 12% bonds, dated March 1, 2021, with face amount of $33 million. The bonds sold for $32.3 million and mature on February 28, 2024. Interest is paid semiannually on August 31 and February 28. Stillworth Corporation acquired $33,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31, and both firms use the straight-line method.

1. Prepare the journal entries to record (a) issuance of the bonds by Western and (b) Stillworth’s investment on April 1, 2018.
2. Prepare the journal entries by both firms to record all subsequent events related to the bonds through maturity.

Answer 1

The journal entries to record the issuance of bonds by Western Communications, Inc. and Stillworth Corporation's investment are made. The subsequent events related to the bonds, such as interest payments and amortization of discount, are also recorded.

Step-by-step explanation:

To record the issuance of the bonds by Western Communications, Inc., the following journal entry is made:

Debit - Cash: $32,300,000

Credit - Bonds Payable: $33,000,000

Credit - Discount on Bonds Payable: $700,000

To record Still worth Corporation's investment, the following journal entry is made:

Debit - Bonds Payable: $33,000

Credit - Cash: $33,000

To record subsequent events related to the bonds, the following journal entries are made:

1. Semiannual Interest Payment:

Debit - Interest Expense: $660,000

Credit - Cash: $660,000

2. Amortization of Discount:

Debit - Discount on Bonds Payable: $60,000

Credit - Interest Expense: $60,000

3. Repayment of Principal at Maturity:

Debit - Bonds Payable: $33,000,000

Credit - Cash: $33,000,000

At maturity, the final journal entry would consist of debiting Bonds Payable and crediting Cash for the face amount of the bonds for Western, while Still worth would debit Cash and credit Investment in Bonds for the face value of the bonds it holds. If any discount or premium remains, it would also be closed out in this transaction.

Answer 2

western

Cash 32,300,000 debit

discount on bonds payable 700,000 debit

bonds payable 33,000,000 credit

interest expense 2,096,666.67‬ debit

discount on bonds payable 116,666.67 credit

cash 1,980,000 credit

(repeat for the 6 interest payment)

at maturity:

bonds payable 33,000,000 debit

cash 33,000,000 credit

stillworth

Investment-Debt securities 32,300 debit

Discount on Debt securities 700 debit

cash 33,000 credit

interest expense 2,096.67‬ debit

discount on bonds payable 116.67 credit

cash 1,980 credit

(repeat for the 6 interest payment)

at maturity:

cash 33,000 debit

Investment-Debt securities 33,000 credit

Step-by-step explanation:

western:

we subtract the face value from the proceeds to determiante how much is the discount

stillworth

As they were acquired as long erm investment we will record using an amortization method as they will be held until maturity. If not, we will simply use face value

amortization of the bonds:

The total payment are 6

so we divide the 700,000 among 6 to know the amortization per payment:

700,000/6 = 116,666.67

cash outlay:

33,000,000 x 0.12/2 = 1,980,000

interest expense will be the sum of both concepts:

1,980,000 + 116,666.67 = 2,096,666.67‬

for the 700 it will be:

700/6 = 116.67

then 33,000 x 0.06 = 1,980

1,980 + 116.67 = 2,096.67 interest expense.