On January 1, 2019, Wildcat Company purchased $100,000 of 6% bonds at face value. The market rate of interest was 8% bonds of similar risk and maturity. The Company paid $90,000 for the bonds. The bonds are to be held to maturity. The bonds pay interest semiannually on July 1 and January 1. Required: (1.) Prepare the appropriate journal entry to record the investment in the bonds. (2.) Record the first interest payment at the effective (market) rate.

Part 1

journal entry to record the investment in the bonds.

Debit : Investment in Bonds $90,000

Credit : Cash $90,000

Part 2

journal entry to record the first interest payment at the effective (market) rate.

Debit : Investment in Bonds $7,200

Credit : Interest Income $7,200

Explanation:

The Summary of the Bond is :

FV = $100,000

PMT = ($100,000 x 6%) ÷ 2 = $3,000

I = 8 %

PV = - $90,000

P/YR = 2

N = ?

Using a Financial Calculator, the number of period payments to maturity N is 13.02.

Effective Interest = $90,000 x 8 % = $7,200

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