Question

On February 1, 2021, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $90 million. The bonds mature on January 31, 2025 (4 years). The market yield for bonds of similar risk and maturity was 8%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $90,000 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

1) Bond price: cash interest * PVIFA(4%,8) + Par value * PVIF(4%,8)
Cromley issue price = 90 * 3% * 6.7327 + 90 * 0.7307 = 83.94129 m
Barnwell purchase price = 90000 * 3% * 6.7327 + 90000 * 0.7307 = 83941.29
2a)
Pd	Cash Int	Int. Exp.	Dis. Amortised	Carrying Value
2/1/2021				83941290
7/31/2021	2700000	3357652	657652	84598942
12/31/2021	2250000	2819965	569965	85168906
1/31/2022	450000	563993	113993	85282899
7/31/2022	2700000	3411316	711316	85994215
12/31/2022	2250000	2866474	616474	86610689
1/31/2023	450000	573295	123295	86733984
7/31/2023	2700000	3469359	769359	87503343
12/31/2023	2250000	2916778	666778	88170121
1/31/2024	450000	583356	133356	88303477
7/31/2024	2700000	3532139	832139	89135616
12/31/2024	2250000	2971187	721187	89856803
1/31/2025	450000	593197	143197	90000000
2b)
Pd	Cash Int	Int. Exp.	Dis. Amortised	Carrying Value
2/1/2021	2700			83941.29
7/31/2021	2700	3358	658	84599
12/31/2021	2250	2820	570	85169
1/31/2022	450	564	114	85283
7/31/2022	2700	3411	711	85994
12/31/2022	2250	2866	616	86611
1/31/2023	450	573	123	86734
7/31/2023	2700	3469	769	87503
12/31/2023	2250	2917	667	88170
1/31/2024	450	583	133	88303
7/31/2024	2700	3532	832	89136
12/31/2024	2250	2971	721	89857
1/31/2025	450	593	143	90000

3) Journal Entries:
Cromley Motor:
date	Acc Titles	Debit $	Credit $
2/1/2021	Cash	83941290
	Dis. On Bond payable	6058710
	Bonds Payable		90000000
	(issue of bond at discount)
Barnwell Industries:
date	Acc Titles	Debit $	Credit $
2/1/2021	Bonds receivable	90000
	Dis. On Bond receivable		6058.71
	Cash		83941.29
	(investment in bond at discount)
3) Journal Entries:
Cromley Motor:
date	Acc Titles	Debit $	Credit $
7/31/2021	Interest exp.	3357652
	Dis. On Bond payable		657652
	Cash		2700000
	(interest paid)
12/31/2021	Interest exp.	2819965
	Dis. On Bond payable		569965
	Interest payable		2250000
	(interest made payable)
1/31/2022	Interest exp.	563993
	Interest payable	2250000
	Dis. On Bond payable		113993
	Cash		2700000
	(interest paid)
7/31/2022	Interest exp.	3411316
	Dis. On Bond payable		711316
	Cash		2700000
	(interest paid)
12/31/2022	Interest exp.	2866474
	Dis. On Bond payable		616474
	Interest payable		2250000
	(interest made payable)
1/31/2023	Interest exp.	573295
	Interest payable	2250000
	Dis. On Bond payable		123295
	Cash		2700000
	(interest paid)
Barnwell Industries:
date	Acc Titles	Debit $	Credit $
7/31/2021	Cash	2700
	Dis. On Bond receivable	658
	Interest revenue		3358
	(interest received)
12/31/2021	Interest receivable	2250
	Dis. On Bond receivable	570
	Interest revenue		2820
	(interest made receivable)
1/31/2022	Cash	2700
	Dis. On Bond receivable	114
	Interest receivable		2250
	Interest revenue		564
	(interest received)
7/31/2022	Cash	2700
	Dis. On Bond receivable	711
	Interest revenue		3411
	(interest received)
12/31/2022	Interest receivable	2250
	Dis. On Bond receivable	616
	Interest revenue		2866
	(interest made receivable)
1/31/2023	Cash	2700
	Dis. On Bond receivable	123
	Interest receivable		2250
	Interest revenue		573
	(interest received)