Question

Pools purchased $ 60 comma 000 of 14​% DMH bonds on January​ 1, 2018​, at a price of 159.5 when the market rate of interest was 6​%. Nautical intends to hold the bonds until their maturity date of January​ 1, 2028. The bonds pay interest semiannually on each January 1 and July 1. Read the requirementsLOADING.... Make the adjusting entries that Nautical Pools would need to make on December​ 31, 2018​, related to the investment in DMH bonds. ​(Record debits​ first, then credits. Exclude explanations from any journal​ entries.) ​First, record the entry for the interest receivable at December​ 31, 2018.

Answer 1

Initial purchase of the bonds on 1st January 2016

Assuming that $60,000 bonds includes 600 bonds with face value of $100 each

Now, Lamar insurance purchased these bonds at a discount price of $159.5 each bond.

So, the total amount invested by Lamar insurance = 600 bonds * $159.5 = $95,700

Therefore journal entry for recording purchase of bonds on 1st January 2016 will be,

Investments in bonds A/c Debit $95,700

To, Bank/Cash A/c credit $95,700

Note: The bonds have been issues at a discount and it seems to be reasonable owing to the fact that the market interest rate is 6% , whereas the bonds have a interest rate of 14%.

Interest entry on the first interest payment date of 1st July 2016

Interest amount to be received on 1st July 2016 = ($60,000 *14%)*6/12 = $4.200

Since interest is paid semi annually, therefore we have taken interest for 6 months.

Journal entry will be:

Bank A/c Debit $4,200

To, Interest on bonds A/c Credit $4,200