Question

Universal Foods issued 10% bonds, dated January 1, with a face amount of $220 million on January 1, 2021. The bonds mature on December 31, 2040 (20 years). The market rate of interest for similar issues was 12%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. (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 at January 1, 2021.

	Table values are based on: n = i = % Cash Flow Amount Present Value Interest Principal Price of bonds

2. to 4. Prepare the journal entries to record their issuance by Universal Foods on January 1, 2021, interest on June 30, 2021 and interest on December 31, 2028.

Answer 1

Answer:

1.)

calculate the present value of face bonds

Particulars	Amount ($)
Face value of bonds (a)	$220,000,000
PV factor at annual market rate of 6% for 40 periods (b)	0.09722
Present value of face value of the bonds (a) x (b)	$21,388,400

calculate present value of interest payments

particulars	Amount ($)
Interest payments amount (a)	$11,000,000
PV factor at an annual market rate of 6% for 40 periods (b)	15.0463
Present value of interest payments (a x b)	$165,509,300

Working:
calculate the amount of interest payment
Interest payment = face value of bonds x interest rate
=$220,000,000 x 5/100 = 11,000,000

calculate the price of bonds
Price of bonds = (present value of principal + Present value of interest payments)
=$21,388,400 + $165,509,300
=$186,897,700

2 to 4)

Date	Particulars	Debit ($)	Credit ($)
Jan-01, 2021	Cash	$186,897,700
	Discount on bonds payable	$33,102,300
	Bonds payable		$220,000,000
	(To record the issuance of bonds)
Jan-30, 2021	Interest expense	$11,827,558
	Discount on bonds payable ($33102300/40)		$827,558
	Cash ($220000000 x 10% x 6/12)		$11,000,000
	(To record payment of semi annual interest)
Dec-31, 2028	Interest expense	$11,827,558
	Discount on bonds payable		$827,558
	Cash		$11,000,000
	(To record payment of semi-annual interest)