Question

On February 1, 2021, Cromley Motor Products issued 10% bonds, dated February 1, with a face amount of $60 million. The bonds mature on January 31, 2025 (4 years). The market yield for bonds of similar risk and maturity was 12%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $60,000 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, 2021.
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, 2021.
4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2023.

Answer 1

Bond price the sum of present value of total cash outflows.

Calculation of Bond Price Interest Date Interest (S60M X 10% X(1/2)) Discounting Factor @ (12%/2) = 6% Present value of interest 31-07-2021 $ 30,00,000.00 0.94 $ 28,30,188.68 31-01-2022 $ 30,00,000.00 0.89 $ 26,69,989.32 31-07-2022 $ 30,00,000.00 0.84 $ 25,18,857.85 31-01-2023 $ 30,00,000.00 0.79 $ 23,76,280.99 31-07-2023 $ 30,00,000.00 0.75 $ 22,41,774.52 31-01-2024 $ 30,00,000.00 0.70 $ 21,14,881.62 31-07-2024 $ 30,00,000.00 0.67 $ 19,95.171.34 31-01-2025 $ 30,00,000.00 0.63 $ 18,82,237.11 Maturity 6,00,00,000.00 0.63 $ 3,76,44,742.28 Price of the bond 5,62,74,123.71

Amortization shcedule Cromely Interest Date Interest expense (Carrying value x 6%) Cash paid ($60M X 10% X(1/2)) Amortization 31-07-2021 31-07-2021 33.76.447.42 33,76,447.42 $ $ 30,00,000.00 $ 3.76.447.42 31-01-2022 33,99,034.27 $ 30,00,000.00 $ 3,99,034.27 31-07-2022 34,22,976.32 $ 30,00,000.00 $ 4,22,976.32 31-01-2023 34,48,354.90 $ 30,00,000.00 $ 4,48,354.90 31-07-2023 34,75,256.20 $ 30,00,000.00 $ 4,75,256.20 31-01-2024 35,03,771.57 $ 30,00,000.00 $ 5,03,771.57 31-07-2024 35,33,997.86 $ 30,00,000.00 $ 5,33,997.86 31-01-2025 35,66,037.74 $ 30,00,000.00 $ 5,66,037.74 Maturity 6,00,00,000.00 $ Carrying value of bond $ 5,62,74,123.71 $ 5.66.50.571.14 || $ 5,70,49,605.40 $ 5,74,72,581.73 $ 5,79,20,936.63 $ 5,83,96,192.83 $ 5,88,99,964.40 $ 5,94,33,962.26 $ 6,00,00,000.00 $ 8

Amortization shcedule Barnwell Interest Date Interest income (Carrying value x 6%) Cash received (S60K x 10% X(1/2)) Amortization Carrying value of bond 31-07-2021 56,274.12 31-07-2021 3,376.45 $ 3,000.00 $ 376.45 $ 56,650.57 31-01-2022 3,399.03 $ 3,000.00 $ 399.03 $ 57,049.61 31-07-2022 3,422.98 $ 3,000.00 $ 422.98 $ 57,472.58 31-01-2023 3,448.35 $ 3,000.00 $ 448.35 57,920.94 31-07-2023 3,475.26 $ 3,000.00 $ 475.26 $ 58,396.19 31-01-2024 3,503.77 $ 3,000.00 $ 503.77 $ 58,899.96 31-07-2024 3,534.00 $ 3,000.00 $ 534.00 $ 59,433.96 31-01-2025 3,566.04 $ 3,000.00 $ 566.04 $ 60,000.00 Maturity 60,000.00 $

Journal entries Cromely Date Particulars 02-01-2021 Cash A/C Bond Discount A/C To Bond Payable (Being Bond issued) Debit Credit $ 5,62,74,123.71 $ 37,25,876.29 $6,00,00,000.00 $ 33,76,447.42 31-07-2021 Interest Expense A/C To Bond Discount A/C To Cash A/C (Being Interest expense charged and bond discount amortized) $ 3,76,447.42 $ 30,00,000.00 $ 33,99,034.27 31-01-2022 Interest Expense A/C To Bond Discount A/C To Cash A/C (Being Interest expense charged and bond discount amortized) $ 3,99,034.27 $ 30,00,000.00 $ 34,22,976.32 31-07-2022 Interest Expense A/C To Bond Discount A/c To Cash A/C (Being Interest expense charged and bond discount amortized) $ $ 4,22,976.32 30,00,000.00

Journal entries Cromely $ 34,22,976.32 31-07-2022 Interest Expense A/C To Bond Discount A/c To Cash A/C (Being Interest expense charged and bond discount amortized) $ $ 4,22,976.32 30,00,000.00 $ 34,48,354.90 31-01-2023 Interest Expense A/C To Bond Discount A/c To Cash A/C (Being Interest expense charged and bond discount amortized) $ $ 4,48,354.90 30,00,000.00 $ 34,75,256.20 31-07-2023 Interest Expense A/C To Bond Discount A/C To Cash A/C (Being Interest expense charged and bond discount amortized) $ 4,75,256.20 $ 30,00,000.00 $ 35,03,771.57 31-01-2024 Interest Expense A/C To Bond Discount A/c To Cash A/C (Being Interest expense charged and bond discount amortized) $ $ 5,03,771.57 30,00,000.00

Journal entries Cromely $ 35,33,997.86 31-07-2024 Interest Expense A/C To Bond Discount A/C To Cash A/C (Being Interest expense charged and bond discount amortized) $ $ 5,33,997.86 30,00,000.00 $ 35,66,037.74 31-01-2025 Interest Expense A/C To Bond Discount A/c To Cash A/C (Being Interest expense charged and bond discount amortized) $ $ 5,66,037.74 30,00,000.00 $ 6,00,00,000.00 31-01-2025 Bond Payable To Bank A/C (Being Bond matured and paid) $6,00,00,000.00

Journal entries Barnwell Credit Debit $ 56,274.12 Date Particulars 02-01-2021 Investment in Bonds A/C To Cash A/C (Being Bond issued) $ 56,274.12 3,000.00 376.45 31-07-2021 Cash A/C Investment in Bonds A/C To Interest income (Being Interest expense charged and bond discount amortized) $ 3,376.45 3,000.00 399.03 $ 31-01-2022 Cash A/C Investment in Bonds A/C To Interest income (Being Interest expense charged and bond discount amortized) $ 3,399.03 $ 3,000.00 422.98 31-07-2022 Cash A/C Investment in Bonds A/C To Interest income (Being Interest expense charged and bond discount amortized) $ 3,422.98

$ $ 3,000.00 448.35 31-01-2023 Cash A/C Investment in Bonds A/C To Interest income (Being Interest expense charged and bond discount amortized) $ 3,448.35 $ $ 3,000.00 475.26 31-07-2023 Cash A/C Investment in Bonds A/C To Interest income (Being Interest expense charged and bond discount amortized) $ 3,475.26 3,000.00 503.77 31-01-2024 Cash A/C Investment in Bonds A/C To Interest income (Being Interest expense charged and bond discount amortized) $ 3,503.77 $ 3,000.00 534.00 31-07-2024 Cash A/C Investment in Bonds A/C To Interest income (Being Interest expense charged and bond discount amortized) $ 3,534.00

Journal entries Barnwell 3,000.00 566.04 $ 31-01-2025 Cash A/C Investment in Bonds A/C To Interest income (Being Interest expense charged and bond discount amortized) $ 3,566.04 $ 60,000.00 31-01-2025.Bank A/c To Investment in Bonds A/C (Being Bond matured and paid) $ 60,000.00