Question

Astro Mile ​& Co. owns vast amounts of corporate bonds. Suppose Astro Mile buys $ 1,400,000 of BitterCo bonds at face value on January​ 2, 2018. The BitterCo bonds pay interest at the annual rate of 8​% on June 30 and December 31 and mature on December 1. Astro Mile intends to hold the investment until maturity.

Required:
a. Journalize any required 2016 entries for the bond investment.
b. How much cash interest will Astro Mile receive each year from CoteCorp?
c. How much interest revenue will Astro Mile report during 2016 on this bond investment?

Answer 1

Answer:

Dr bond investment             $1,400,000

Cr cash                                                        $1,400,000

Cash interest is  $112,000.00

Interest revenue for the year is also $ 112,000.00  

Explanation:

The cash paid for the investment is $1,400,000, this would be debited to bond investment and credited to cash since it is an outflow of cash from the business.

At six-month interval, coupon receivable=$1,400,000*8%*1/2=$ 56,000.00  

annual coupon receivable=$ 56,000.00 *2=$ 112,000.00