Question

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2021, paying $1,410,375. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity.*USE T ACCOUNTS

On July 1, 2018, Patton Company should increase its Debt Investments account for the Scott Company bonds by?

For the year ended December 31, 2018, Patton Company should report interest revenue from the Scott Company bonds of?

Answer 1

On July 1, 2018, Patton Company should increase its Debt Investments account for the Scott Company bonds by?

I will assume that the bonds were purchased on January 2018 and not January 2021.

The journal entry to record the purchase of the bonds was:

January 1, 2018, investment on bonds

Dr Debt Investment 1,500,000

Cr Cash 1,410,375

Cr Discount on Debt Investment 89,625

the journal entry to record the interests received on July 1, 2018 would be:

Dr Cash 75,000

Dr Discount on Debt Investment 2,570.63

Cr Interest revenue 77,570.63

Discount on Debt Investment = ($1,410,375 x 5.5%) - ($1,500,000 x 5%) = $77,570.63 - $75,000 = $2,570.63

Patton company should increase its Debt investment by $2,570.63 (amortized discount).

For the year ended December 31, 2018, Patton Company should report interest revenue from the Scott Company bonds of?

The journal entry to record accrued interests:

Dr Interest receivable 75,000

Dr Discount on Debt Investment 2,712

Cr Interest revenue 77,712

Discount on Debt Investment = ($1,412,945.63 x 5.5%) - ($1,500,000 x 5%) = $77,712 - $75,000 = $2,712

Total interest revenue for 2018 = $77,570.63 + $77,712 = $155,282.63