Question

Universal Foods issued 8% bonds, dated January 1, with a face amount of $130 million on January 1, 2021. The bonds mature on December 31, 2035 (15 years). The market rate of interest for similar issues was 10%. 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.
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

Requirement 1:

Interest payment = $130,000,000 x 8% x 6/12 = $5,200,000

Present value of interest payments	$79,936,740
[$5,200,000 x 15.37245 present value annuity factor (5%, 30 years)]
Present value of face value of the bonds	$30,078,100
[$130,000,000 x 0.231377 present value factor (5%, 30 years)]
Issue price of the bonds	$110,014,840

Requirement 2 to 4:

	Date	Account title and Explanation	Debit	Credit
2	1/1/2021	Interest expense	$5,866,172
		Discount on bonds payable		$666,172
		Cash		$5,200,000
		[To record payment of interest]
3	06/30/2021	Interest expense	$5,866,172
		Discount on bonds payable		$666,172
		Cash		$5,200,000
		[To record payment of interest]
4	12/31/2028	Interest expense	$5,866,172
		Discount on bonds payable		$666,172
		Cash		$5,200,000
		[To record payment of interest]

Calculations:

Face value of the bonds	$130,000,000
(-) Issue price	($110,014,840)
Total discount on bonds	$19,985,160
÷ Number of payments (15 years x 2 payments)	30
= Discount amortization for each payment	$666,172