Question

On February 1, 2021, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $55 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 $55,000 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

PV @ 4% period 1 0.96154 Answer 1. Issue Price of Bonds $ 51,296,971 Table Value Based on n= Amount Cash Flow Interest - $55,000,000 X 6% X 6/12 8 (4 Year X 2) 4.00% (8%/2) Present Value 1,650,000 $ 11,109,021 ($1650,000 X 6.73274) 55,000,000 40187950 ($55,000,000 X 0.73069) 51,296,971 3,703,029 period 2 period 3 period 4 period 5 period 6 period 7 period 8 Annuity 0.92456 0.88900 0.85480 0.82193 0.79031 0.75992 0.73069 6.73274 Principal Issue Price of Bonds Discount on issue of Bonds

Answer 2-b. Barnwell purchased Bonds (Face Value) = $55,000 Amount to be paid by Barnwell for Bonds = $ 55,000 X 51296971 /55,000,000 Amount to b $ 51,297 Barnwell Industries Bond Discount Amortization Schedule Interest Revenue - Interest Recd - $55,000 Preceeding Bond Date X 6%X6/12 Carrying Value X 8% 6/12 B Discount Amortization Unamortized Discount Bonds Carrying Amount C = B-A DED-C E = $ 55,000-D 51,297 01-Feb-18 31-Jul-18 $ 31-Jan-19 $ 31-Jul-19 $ 31-Jan-20$ 31-Jul-20 $ 31-Jan-21 $ 31-Jul-21 $ 31-Jan-22 $ 1,650 $ 1,650 $ 1,650 $ 1,650 $ 1,650 $ 1,650 $ 1,650 $ 1,650 $ 2,052 $ 2,068 2,085 $ 2,102 2,120 2,139 $ 2,159 $ 2,179 $ 402$ 418$ 435 $ 452 470 489 $ 3,703 $ 3,301$ 2,883 $ 2,449 $ 1,996 1,526 1,037 $ 529 $ 51,699 52,117 52,551 53,004 53,474 53,963 54,471 55,000 509 $

Debit credit 51,296,971 3,703,029 Answer 3 & 4. Books of Cromley Motor Products Date Account Title and Explanation 01-Feb-18 Cash Discount on Issue of Bonds Bonds Payable (record the issue of bonds) 31-Jul-18 Interest Expense Discount on issue of Bonds Cash (Record the interest paid) $ 55,000,000 2,051,879 401,879 $ 1,650,000 1,723,295 348,295 1,375,000 344,659 1,375,000 31-Dec-18 Interest Expense Discount on issue of Bonds Interest Payable ( 5 months) (Record the interest Due) 31-Jan-19 Interest Expense Interest Payable Discount on issue of Bonds Cash (record the interest paid) 31-Jul-19 Interest Expense Discount on issue of Bonds Cash (Record the interest paid) 69,659 1,650,000 2,084,672 434,672 1,650,000

2,084,672 434,672 1,650,000 1,751,716 31-Jul-19 Interest Expense Discount on issue of Bonds Cash (Record the interest paid) 31-Dec-19 Interest Expense Discount on issue of Bonds Interest Payable (Record the interest Due) 31-Jan-20 Interest Expense Interest Payable Discount on issue of Bonds Cash (record the interest paid) 376,716 1,375,000 350,343 1,375,000 75,343 1,650,000 $

Books of Barnwell Industries Journal Entry Date Account Title and Explanation Debit credit 55,000 01-Feb-18 Investment in Bonds Cash Discount on Bonds Investments (record the Bonds Purchased) 51,297 3,703 1,650 402 31-Jul-18 Cash Discount on Bonds Investment Interest Revenue (record the interest received) 2,052 1,375 348 31-Dec-18 Interest Receivable Discount on Bonds Investment Interest Revenue (record the interest receivable) 1,723 1,650 31-Jan-19 Cash Discount on Bonds Investment Interest Revenue Interest Receivable (Record the interest received) 345 1,375

1,650 435 31-Jul-19 Cash Discount on Bonds Investment Interest Revenue (record the interest received) 2,085 1,752 377 31-Dec-19 Interest Receivable Discount on Bonds Investment Interest Revenue (record the interest receivable) 2,128 1,650 75 31-Jan-20 Cash Discount on Bonds Investment Interest Revenue Interest Receivable Record the interest received) 426 1,300