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9 March, 21:49

On April 1, 2018, Western Communications, Inc., issued 12% bonds, dated March 1, 2018, with face amount of $44 million. The bonds sold for $43.3 million and mature on February 28, 2021. Interest is paid semiannually on August 31 and February 28. Stillworth Corporation acquired $44,000 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. Prepare the journal entries to record (a) issuance of the bonds by Western and (b) Stillworth's Investment on April 1, 2018

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  1. 10 March, 01:44
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    cash 43,300,000 debit

    discount on BP 1, 140,000 debit

    bonds payable 44,000,000 credit

    interest payable 440,000 credit

    - - to record issuance of BP - -

    investment on bonds 44,000 debit

    cash 43,050 credit

    discount on bonds 950 credit

    - - to record purchase of bonds - -

    Explanation:

    Face amount: 44,000,000

    interest payable 440,000

    issued at 43,300,000

    discount 1,140,000

    accrued interest: 44,000,000 x 12% / 12 = 440,000

    The company issued the bonds for less than his face value. The bonds have a discount.

    carrying value of the bonds at August 31th

    1,140,000 / 6 = 190,000 amortization

    1,140,000 - 190,000 = 950,000

    Carrying value 44,000,000 - 950,000 = 43,050,000

    Investment: 44,000 in bonds

    the bonds will also have a discount so it were purchase at 43,050

    44,000,000 - -> 43,050,000

    44,000 - -> 43,050
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