Question

On February 1, 2021, Cromley Motor Products issued 12% 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 14%. 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

30 31 32 33 34 35 Years to maturity Annual Coupon Rate Coupon PMT Par value YTM Price 8 6.0% 3,600,000 60,000,000 7.00% $56,417,221 Amount of Interest (60000000*12%*6/12) (A) PV factor for 1 =7% n=8 (B) P.V of Interest P.V of Par Value (60000000*.58201) Proceeds 3600000 5.97128 21,496,621 34,920,600 56,417,221 36 37 38 2a. prepare amortization schedules that indicate Cromley's effective interest expense for each period during the term to maturity. 39 Cash Interest Paid Bond Interest Paid Increase in Balance Balance 40 Semiannual 41 Interest Period 42 43 44 45 1 2 3 4 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,949,205 3,973,650 3,999,805 4,027,792 4,057,737 4,089,779 4,124,063 4,160,748 349,205 373,650 399,805 427,792 457,737 489,779 524,063 560,748 56,417,221 56,766,426 57,140,076 57,539,882 57,967,673 58,425,410 58,915,189 59,439,252 60,000,000 5 6 46 47 48 49 7 8

4,028 51 2b. Prepare amortization schedules that indicate Barnwell's effective interest revenue for each interest period during the term to maturity. ( 52 53 Semiannual Cash Received Bond Interest Paid Increase in Balance Balance 54 Interest Period 55 1 3,600 3,949 349 56 2 3,600 3,974 374 57 3 3,600 4,000 400 58 4 3,600 428 59 5 3,600 4,058 458 60 6 3,600 4,090 490 61 7 3,600 4,124 524 62 8 3,600 4,161 561 63 64 3. Prepare the journal entries to record the issuance of the bonds by Cromley and Barnwell's investment on February 1, 2021 65 66 In the books of Cromley 67 Date Account Title & Explanation Debit Credit 68 2021 69 01-Feb Cash 56,417,221 70 Discount on Bonds Payable 3,582,779 71 Bonds Payable 60000000 56,417 56,766 57,140 57,540 57,968 58,425 58,915 59,439 60,000

74 75 Date Debit Credit 76 In the books of Barnwell Account Title & Explanation 2021 Bond investment Discount on bond investment Cash 60000 77 3,583 56,417 78 79 80 4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2020. 81 82 a. Record the payment of interest for Cromley Company., on July 31, 2021 83 84 85 Debit Credit 86 In the books of Cromley Date Account Title & Explanation 2021 Jul-31 Interest expense Discount on Bonds Payable 87 3,949,205 88 349,205 3,600,000 89 Cash 90 (to reord payment of interest and amortization of discount) 91

92 b. Record the accrued interest for Cromley Company. On December 31, 2021 93 94 95 3,311,375 96 2021 Dec-31 Interest expense Discount on Bonds Payable Interest Payable (to reord accrual of interest and amortization of discount) 311,375 3,000,000 97 98 99 102 103 100 c. Record the payment of interest for Cromley Company, on January 31, 2022 101 2022 31-Jan Interest expense Interest Payable Discount on Bonds Payable 106 Cash 107 (to reord payment of interest and amortization of discount) 108 662,275 3,000,000 104 105 62,275 3,600,000

Credit 399,805 3,600,000 115 109 d. Record the payment of interest for Cromley Company. On July 31, 2022 110 111 Date Account Title & Explanation Debit 112 2022 113 Jul-31 Interest expense 3,999,805 114 Discount on Bonds Payable Cash 116 (to reord payment of interest and amortization of discount) 117 118 e. Record the accrued interest for Cromley Company. On December 31, 2023 119 120 2023 121 Dec-31 Interest expense 3,356,493 122 Discount on Bonds Payable 123 Interest Payable 124 (to reord accrual of interest and amortization of discount) 125 356,493 3,000,000

126 f. Record the payment of interest for Cromley Company. On January 31, 2023 127 128 2023 129 31-Jan Interest expense 130 Interest Payable 131 Discount on Bonds Payable 132 Cash 133 (to reord payment of interest and amortization of discount) 671,299 3,000,000 71,299 3,600,000 134 135 5. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2020 136 137 a. Record the payment of interest for Barnwell Company., on July 31, 2021 138 139 In the books of Barnwell 140 Date Account Title & Explanation Debit Credit 141 2021 142 31-Jul Cash 3,600 143 Discount on Bond Investment 349 144 Interest Revenue 3,949

148 Credit 146 b. Record the accrued interest for Barnwell Company.. On December 31, 2021 147 Date Account Title & Explanation Debit 149 20211 Interest Receivable 31-Dec Discount on Bond Investment Interest Revenue 152 153 c. Record the receipt of interest for Barnwell Company. on January 31, 2022 3,000 311 150 151 3,311 154 155 156 2022 31-Jan Cash Discount on Bond Investmnt Interest Receivable Interest Revenue 3,600 62 157 158 3,000 662 159 160 161 d. Record the receipt of interest for Barnwell Company. On July 31, 2022 162 163 164 2022 Jul-31 Cash Discount on Bond Investmnt Interest Revenue 3,600 400 165 166 4,000

168 e. Record the accrued interest for Barnwell Company. On December 31, 2022 169 170 Debit Credit 171 Date Account Title & Explanation 2022 Interest Receivable 31-Dec Discount on Bond Invest Interest Revenue 3,000 356 172 173 3,356 174 175 f. Record the receipt of interest for Barnwell Company. On January 31, 2023 176 177 178 2023 31-Jan Cash Discount on Bond Investmnt Interest Receivable Interest Revenue 3,600 71 179 180 3,000 671 181 182