On April 1, 2021, Western Communications, Inc., issued 12% bonds, dated March 1, 2021, with face amount of $33 million. The bonds sold for $32.3 million and mature on February 28, 2024. Interest is paid semiannually on August 31 and February 28. Stillworth Corporation acquired $33,000 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.

1. Prepare the journal entries to record (a) issuance of the bonds by Western and (b) Stillworth's investment on April 1, 2018.

2. Prepare the journal entries by both firms to record all subsequent events related to the bonds through maturity.

western

Cash 32,300,000 debit

discount on bonds payable 700,000 debit

bonds payable 33,000,000 credit

interest expense 2,096,666.67‬ debit

discount on bonds payable 116,666.67 credit

cash 1,980,000 credit

(repeat for the 6 interest payment)

at maturity:

bonds payable 33,000,000 debit

cash 33,000,000 credit

stillworth

Investment-Debt securities 32,300 debit

Discount on Debt securities 700 debit

cash 33,000 credit

interest expense 2,096.67‬ debit

discount on bonds payable 116.67 credit

cash 1,980 credit

(repeat for the 6 interest payment)

at maturity:

cash 33,000 debit

Investment-Debt securities 33,000 credit

Explanation:

western:

we subtract the face value from the proceeds to determiante how much is the discount

stillworth

As they were acquired as long erm investment we will record using an amortization method as they will be held until maturity. If not, we will simply use face value

amortization of the bonds:

The total payment are 6

so we divide the 700,000 among 6 to know the amortization per payment:

700,000/6 = 116,666.67

cash outlay:

33,000,000 x 0.12/2 = 1,980,000

interest expense will be the sum of both concepts:

1,980,000 + 116,666.67 = 2,096,666.67‬

for the 700 it will be:

700/6 = 116.67

then 33,000 x 0.06 = 1,980

1,980 + 116.67 = 2,096.67 interest expense.