Question

On February 1, 2018, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $75 million. The bonds mature on January 31, 2022 (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 $75,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31.

1. Determine the price of the bonds issued on February 1, 2018.
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, 2018.
4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2020.

Answer 1

Answer :-

Year	PV factor @ 4%
1	0.96154
2	0.92456
3	0.88900
4	0.85480
5	0.82193
6	0.79031
7	0.75992
8	0.73069
Total	6.73274

Coupon rate per Period (6%/2)	3.00%
Face value of bond	75,000,000
Market or Discounting rate per Period (8%/2)	4.00%
Interest paid (75000000*3%)	2250000
PV of interest (2250000*6.73274)	$        15,148,665
PV of Principal (75000000*0.73069)	$        54,801,750
Present value of Bond	$        69,950,415
Discount on Bond payable (75000000-69950415)	$          5,049,585
Barnwell purchased = $ 75,000 ÷ 75,000,000 = 0.10% of the bonds issued
Price paid by Barnwell (69950415*0.1%)	$                69,950
Interest payment received by Barnwell = 75000*3% = 2250

Answer 2

Fair value
Interest payment (Credit Cash) = Face value of bond * Coupon rate
Interest Expense (Debit Interest Expense) = book value of Bond for previous period * Market or Discounting rate
Amortization of bond Discount (Credit Bond Discount) = Interest Expense - Interest payment
Debit Balance in Bond Discount = Debit Balance in Bond Discount for previous period - Amortization of bond Discount
Credit Balance in Bond Payable = Face value of bond
Book value of Bond = Credit Balance in Bond Payable - Debit Balance in Bond Discount
Bond Discount Amortization Table (Cromley)
Period	Date	Interest payment	Interest Expense	Amortization of bond Discount	Debit Balance in Bond Discount	Credit Balance in Bond Payable	Book value of Bond
0	Feb 1, 2018				5049585	75,000,000	69950415
1	July 31, 2018	2250000	2798017	548017	4501568	75000000	70498432
2	Jan31, 2019	2250000	2819937	569937	3931631	75000000	71068369
3	July 31, 2019	2250000	2842735	592735	3338896	75000000	71661104
4	Jan31, 2020	2250000	2866444	616444	2722452	75000000	72277548
5		2250000	2891102	641102	2081350	75000000	72918650
6		2250000	2916746	666746	1414604	75000000	73585396
7		2250000	2943416	693416	721189	75000000	74278811
8		2250000	2971189	721189	0	75000000	75000000

Discount Amortization Table (Barnwell)
Period	Date	cash Interest Receipt	Interest Revenue	Amortization of Discount	Credit Balance in Bond Discount	Investment in Bonds (Debit)	Book value of Bond
0	Feb 1, 2018				5050	75000	69950
1	July 31, 2018	2250	2798	548	4502	75000	70498
2	Jan31, 2019	2250	2820	570	3932	75000	71068
3	July 31, 2019	2250	2843	593	3339	75000	71661
4	Jan31, 2020	2250	2866	616	2722	75000	72278
5		2250	2891	641	2081	75000	72919
6		2250	2917	667	1415	75000	73585
7		2250	2943	693	721	75000	74279
8		2250	2971	721	0	75000	75000

Answer 3 and 4

Cromley Motor
Journal entries
Date	General Journal	Debit	Credit
Feb 1, 2018	Cash	69,950,415
	Discount on Bond payable	5,049,585
	Bond payable		75,000,000
	(To record issued of bond payable at Discount.)
July 31, 2018	Interest expense	2,798,017
	Discount on Bond payable		548,017
	Cash		2,250,000
	(To record interest expense and amortization of bond Discount.)
Dec 31, 2018	Interest expense (2819937*5/6)	2,349,948
	Discount on Bond payable (569937*5/6)		474,948
	Interest Payable (2250000*5/6)		1,875,000
	(To record accrued interest expense and amortization of bond Discount.)
Jan31, 2019	Interest expense (2819937*1/6)	469,990
	Interest Payable	1,875,000
	Discount on Bond payable (569937*1/6)		94,990
	Cash		2,250,000
	(To record interest expense and amortization of bond Discount.)
July 31, 2019	Interest expense	2,842,735
	Discount on Bond payable		592,735
	Cash		2,250,000
	(To record interest expense and amortization of bond Discount.)
Dec 31, 2019	Interest expense (2866444*5/6)	2,388,703
	Discount on Bond payable (616444*5/6)		513,703
	Interest Payable (2250000*5/6)		1,875,000
	(To record accrued interest expense and amortization of bond Discount.)
Jan31, 2020	Interest expense (2866444*1/6)	477,741
	Interest Payable	1,875,000
	Discount on Bond payable (616444*1/6)		102,741
	Cash		2,250,000
	(To record interest expense and amortization of bond Discount.)

Barnwell
Journal entries
Date	General Journal	Debit	Credit
Feb 1, 2018	Investment in long term Bond	75,000
	Discount - Investment in bond		5,050
	Cash		69,950
	(To record Cash Invested in long term Bond.)
July 31, 2018	Cash	2,250
	Discount - Investment in bond	548
	Interest revenue		2,798
	(To Record Interest Revenue.)
Dec 31, 2018	Interest Receivable (2250*5/6)	1,875
	Discount - Investment in bond (570*5/6)	475
	Interest revenue (2820*5/6)		2,350
	(To Record accrued Interest Revenue.)
Jan31, 2019	Cash	2,250
	Discount - Investment in bond (570*1/6)	95
	Interest Receivable		1,875
	Interest revenue (2820*1/6)		470
	(To Record Interest Revenue.)
July 31, 2019	Cash	2,250
	Discount - Investment in bond	593
	Interest revenue		2,843
	(To Record Interest Revenue.)
Dec 31, 2019	Interest Receivable (2250*5/6)	1,875
	Discount - Investment in bond (616*5/6)	513
	Interest revenue (2866*5/6)		2,388
	(To Record accrued Interest Revenue.)
Jan31, 2020	Cash	2,250
	Discount - Investment in bond (616*1/6)	103
	Interest Receivable		1,875
	Interest revenue (2866*1/6)		478
	(To Record Interest Revenue.)

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