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Given- Lamar Corporation owns 60 percent of Humbolt Corporation’s voting shares. On January 1, 20X2, Lamar Corporation sold $170,000 par value, 10 percent first mortgage bonds to Humbolt for $177,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. I am trying to find the breakdown for interest income and investment in Lamar corporation bonds. I know that the two should total 8,500.

Answer :

Answer:

The necessary journal entries are:

Dr Cash                                  $8,500

Cr Investment in Lamar Co.               $700

Cr Interest income                              $7,800

Being receipt of  coupon interest and amortization of bond premium

Find detailed analysis in the explanation section below.

Explanation:

The semi-annual interest receivable from investment in Lamar corporation bonds is calculated thus:

interest income=par value* coupon rate *6months/12months

interest income=$170,000*10%*6/2

Interest income =$8,500

Also the premium paid upon the purchase of the bonds of $7000($177,000-$170,000) should be amortized over the entire duration of investment of 10 years, hence yearly amortization of premium is $7000/10yrs

that is $700 per year

The breakdown the $8,500 into interest income and amortization of premium is shown below:

Dr Cash                                  $8,500

Cr Investment in Lamar Co.               $700

Cr Interest income                              $7,800

Being receipt of  coupon interest and amortization of bond premium

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