Question

On February 1, 2018, Cromley Motor Products issued 9% bonds, dated February 1, with a face amount of $80 million. The bonds mature on January 31, 2022 (4 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $80,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price of the bonds issued on February 1, 2018.
2-a. Prepare amortization schedules that indicate Cromley’s effective interest expense for each interest period during the term to maturity.
2-b. Prepare amortization schedules that indicate Barnwell’s effective interest revenue for each interest period during the term to maturity.
3. Prepare the journal entries to record the issuance of the bonds by Cromley and Barnwell’s investment on February 1, 2018.
4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2020.

Answer 1

Answer-1:

The price of the bond = $77,414,715

Answer-2(a):

Cash Paid (80,000,000 > 9%) Year 7/31/2018 1/31/2019 7/31/2019 1/31/2020 7/31/2020 1/31/2021 7/31/2021 1/31/2022 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 SCHEDULE OF DISCOUNT AMORTIZATION Amortization of Interest expense Bond discount Debit balance in Credit balance in (10% < previous cv) (3) - (2) Bond discount Bonds payable Acc. 2,585,285 80,000,000 3,870,736 270,736 2,314,549 80,000,000 3,884,273 284,273 2,030,277 80,000,000 3,898,486 298,486 1,731,791 80,000,000 3,913,410 313,410 1,418,380 80,000,000 3,929,081 329,081 1,089,299 80,000,000 3,945,535 345,535 743,764 80,000,000 3,962,812 362,812 380,952 80,000,000 3,980,952 380,952 (0) 80,000,000 Carrying value(CV) of Bonds (6) - (5) 77,414,715 77,685,451 77,969,723 78,268,209 78,581,620 78,910,701 79,256,236 79,619,048 80,000,000

Answer-2(b):

SCHEDULE OF INTEREST REVENUE Interest revenue Capitalization of (Int recd+prem Balance in Bond premium capitalization) Bond Premium Bonds investment Year Interest received (80,000,000 9%) 7/31/2018 1/31/2019 7/31/2019 1/31/2020 7/31/2020 1/31/2021 17/31/2021) 1/31/2022 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,923,161 3,923,161 3,923,161 3,923,161 3,923,161 3,923,161 3,923,161 3,923,161 323,161 323,161 323,161 323,161 323,161 323,161 323,161 323,161 2,585,285 2,262,124 1,938,964 1,615,803 1,292,643 969,482 646,321 323,161 77414715 77,737,876 78,061,036 78,384,197 78,707,358 79,030,518 79,353,679 79,676,839 80,000,000

Answer-3:

Cash	77,414,715
Discount on Bonds payable	2,585,285
Bonds payable		80,000,000