Question

On February 1, 2021, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $95 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 $95,000 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)
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.

Req 4 Cromley

• 1) Record the payment of interest for Cromley Company.

• 2) Record the accrued interest for Cromley Company.

• 3) Record the payment of interest for Cromley Company.

• 4) Record the payment of interest for Cromley Company.

• 5) Record the accrued interest for Cromley Company.

• 6) Record the payment of interest for Cromley Company.

Req 4 Barnwell

• 1) Record the receipt of interest for Barnwell Company.

• 2) Record the accrued interest for Barnwell Company.

• 3) Record the receipt of interest for Barnwell Company.

• 4) Record the receipt of interest for Barnwell Company.

• 5) Record the accrued interest for Barnwell Company.

• 6) Record the receipt of interest for Barnwell Company.

Answer 1

1	Price of the bonds issued:
	Intererest payment per semi-annual period=95000000*6%*1/2=2850000
	Discount rate=Market yield=8%=4% for semi-annual period
	Life of the bond=4 Years=8 semi-annual period
	Present value of interest at 4% for 8 years=2850000*Present value at 4% for 8 years=2850000*6.732745=$ 19188323
	Present value of bond maturity value at 4% for 8th year=95000000*Present value at 4% for 8th year=95000000*0.73069=$ 69415550
	Price of the bond=19188323+69415550=$ 88603873
2-a.	Discount on issue=95000000-84950423=$ 10049577
	Date	Beginning balance	Cash paid	Effective interest	Discount amortization	Ending balance
		A	B	C=A*4%	D=C-B	E=A+D
			(Interest paid semi-annually)
	Feb 1,2021					88603873
	Jul 31,2021	88603873	2850000	3544155	694155	89298028
	Jan 31,2022	89298028	2850000	3571921	721921	90019949
	Jul 31,2022	90019949	2850000	3600798	750798	90770747
	Jan 31,2023	90770747	2850000	3630830	780830	91551577
	Jul 31,2023	91551577	2850000	3662063	812063	92363640
	Jan 31,2024	92363640	2850000	3694546	844546	93208186
	Jul 31,2024	93208186	2850000	3728327	878327	94086513
	Jan 31,2025	94086513	2850000	3763488	913488	95000000
2-b.	Barnwell acquired $ 95000 of $90000000
	Acquired 0.1% (95000/95000000)
	Price of the bond=88603873*0.1%=$ 88603.87=$ 88604
	Interest received=2850000*0.1%=$ 2850
	Discount on issue=95000-88604=$ 6396
	Date	Beginning balance	Cash Received	Effective interest	Discount amortization	Ending balance
		A	B	C=A*4%	D=C-B	E=A+D
			(Interest paid semi-annually)
	Feb 1,2021					88604
	Jul 31,2021	88604	2850	3544	694	89298
	Jan 31,2022	89298	2850	3572	722	90020
	Jul 31,2022	90020	2850	3601	751	90771
	Jan 31,2023	90771	2850	3631	781	91552
	Jul 31,2023	91552	2850	3662	812	92364
	Jan 31,2024	92364	2850	3695	845	93208
	Jul 31,2024	93208	2850	3728	878	94087
	Jan 31,2025	94087	2850	3763	913	95000

3	In the books of Cromley,
	Date	Account titles and explanation					Debit	Credit
	Feb 1,2021	Cash					88603873
		Discount on issue of bonds					6396127
		Bonds payable						95000000
		(Bond issued)
	In the books of barnwell,
	Date	Account titles and explanation					Debit	Credit
	Feb 1,2021	Investment in bonds					95000
		Discount on bonds						6396
		Cash						88604
		(Bond issued)

Debit Credit 3544155 694155 2850000 2976601 601601 2375000 4 In the books of Cromley, Date Account titles and explanation Jul 31,2021 Interest expense Discount on issue of bonds Cash (Interest paid on bonds) Dec 31,2021 Interest expense (3571921*5/6) Discount on issue of bonds (Plug) Interest payable (2850000*5/6) (Interest due on bonds from Jul 31 to Dec 31-5 months) Jan 31, 2022 Interest expense (3571921*1/6) Interest payable Discount on issue of bonds (plug) Cash (Interest paid on bonds) Jul 31,2022 Interest expense Discount on issue of bonds Cash (Interest paid on bonds) Dec 31,2022 Interest expense (3630830*5/6) Discount on issue of bonds (plug) Interest payable (2850000*5/6) (Interest due on bonds from Jul 31 to Dec 31-5 months) 595320 2375000 120320 2850000 3600798 750798 2850000 3025692 650692 2375000

605138 2375000 (Interest due on bonds from Jul 31 to Dec 31-5 months) Jan 31,2023 Interest expense (3630830*1/6) Interest payable Discount on issue of bonds (plug) Cash (Interest paid on bonds) 130138 2850000 Debit Credit 2850 694 3544 2375 In the books of Barnwell, Date Account titles and explanation Jul 31,2021 Cash Discount on bonds Interest revenue (Interest received on bonds) Dec 31,2021 Interest receivable Discount on bonds Interest revenue (Interest due on bonds) Jan 31,2022 Cash Discount on bonds Interest receivable Interest revenue (Interest received on bonds) Jul 31,2022 Cash Discount on bonds (2850*5/6) (Plug) (3572*5/6) 602 2977 2850 (Plug) 120 2375 (3572*1/6) 595 2850 751

28501 751 3601 2375 Jul 31, 2022 Cash Discount on bonds Interest revenue (Interest received on bonds) Dec 31,2022 Interest receivable Discount on bonds Interest revenue (Interest due on bonds) Jan 31, 2023 Cash Discount on bonds Interest receivable Interest revenue (Interest received on bonds) (2850*5/6) (Plug) (3631*5/6) 651 3026 28501 130 (Plug) 2375) (3631*1/6) 605