Question

Accounting for debt investmentsAdvance & Co. owns vast amounts of corporate bonds. Suppose Advance buys 51,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturityRequirements1. Journalize any required 2018 entries for the bond investment.2. How much cash interest will Advance receive each year from FermaCo?3. How much interest revenue will Advance report during 2018 on this bond investment?

Answer 1

1) January 2, 2018, investment in FermaCo bonds

Dr Investment in FermaCo bonds 51,100,000

Cr Cash 51,100,000

June 30, 2018, coupon payment received from FermaCo bonds

Dr Cash 766,500

Cr Interest revenue 766,500

December 31, 2018, coupon payment received from FermaCo bonds

Dr Cash 766,500

Cr Interest revenue 766,500

2) cash interest received per year = $766,500 x 2 = $1,533,000

3) interest revenue reported from investment in FermaCo bonds = $1,533,000