Question

Universal Foods issued 12% bonds, dated January 1, with a face amount of $150 million on January 1, 2021. The bonds mature on December 31, 2030 (10 years). The market rate of interest for similar issues was 14%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. (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 at January 1, 2021. 2. to 4. Prepare the journal entries to record their issuance by Universal Foods on January 1, 2021, interest on June 30, 2021 and interest on December 31, 2028.

Answer 1

Ans:

1. Issuance price of bond is the present value of future cash flows.
Present value of coupon		$        95,346,128
Present value of par value		$        38,762,850
Present value of Bonds Payable		$      134,108,979
Expected Cash Proceeds to be received from Issuance of Bonds		$      134,108,979
Workings:
Coupon Payment	=	Par Value	*	Semi annual coupon rate
	=	$ 150,000,000.00	*	6.00%
	=	$     9,000,000.00
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+ 0.07)^- 20)/ 0.07		i	=	7.00%
	=	10.59401		n	=	20
Present value of 1	=	(1+i)^-n
	=	(1+ 0.07)^- 20
	=	0.25842
Present value of coupon	=	Coupon Payment	*	Present value of annuity of 1
	=	$     9,000,000.00	*	10.59401
	=	$        95,346,128
Present value of par value	=	Par Value	*	Present value of 1
	=	$ 150,000,000.00	*	0.25842
	=	$        38,762,850

S.No	Date	Account Title	Debit	Credit
2	Jan-01	Cash	$     134,108,979
		Discount on Bonds Payable	$        15,891,021
		Bonds Payable		150,000,000
		(To record the Issuance of Bonds)
3	Jun-30	Interest Expense	$          9,794,551
		Discount on Bonds Payable ( 15891021/ 20)		$       794,551
		Cash		$    9,000,000
		(To record the Interest paid)
4	Dec-31	Interest Expense	$          9,794,551
		Discount on Bonds Payable ( 15891021/ 20)		$       794,551
		Cash		$    9,000,000
		(To record the Interest paid)