Question

On February 1, 2021. Cromley Motor Products issued 12% bonds, dated February 1, with a face amount of $85 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 $85,000 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

Cromley Motor Products Part 1: Determine the price of the bonds issued on February 1, 2021. Cromley: Cash interest paid: 12% x $85,000,000 x 6/12 = $5,100,000 Present value of interest: Table 4, 8 payments @ 7% = 5.97129 x $5,100,000 = $30,453,579 Present value of $85 million: Table 2, 8 periods @ 7% = 0.58201 x $85,000,000 = $49,470,850 Price of bonds: $79,924,429 ($30,453,579 + Barnwell purchased 85,000 - 85,000,000 = 0.1% of the bonds. Therefore, the price paid was 0.1% x $79,924,429 = $79,924 $49,470,850)

Part 2: Prepare the amortization schedules that indicates (a) Cromley's effective interest expense and (b) Barnwell's effective interest revenue for each interest period during the term to maturity. Cromley Barnwell Effective Cash Discount Cash Effective Discount Balance Payment Interest mortisatio Balance Pmt Payment Interest @ 7% Amortisation Pmt 79924429 79925 80420 5100000 5594710 494710 80419139 1. 5100 5595 495 5100 2. 5100000 5629340 529340 80948479 2. 5629 529 80949 5100000 5666394 3 566394 81514872 3 5100 5666 566 81516 4 51000 5706041 606041 82120913 4 510 5706 606 8212 5100 5749 5100000 5748464 648464 82769377 649 82770 5100000 5793856 693856 83463234 6. 5100 5794 694 83464 5100000 5842426 742426 84205660 5100 5842 742 84207 794340 85000000 5100 5100000 5894340 5893 793 85000 Part 3: Prepare the journal entries to record (a) the issuance of the bonds by Cromley and (b) Barnwell's investment on February 1, 2021 Cromley: Cash a/c 79924429 Dr. Discount on B/P a/c Dr. 5075571 To Bonds Payable 85000000 Barnwell: Investment in Bonds a/c Dr. 85000 To Discount on bond investment 5075 To Cash 79925

Part 4: Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2021. Cromley: Interest Expense a/c To Discount on B/P 31.7.2016 Dr. 5594710 494710 To Cash 5100000 31.12.2016 Interest Expense a/c Dr. 4691116.4 To Discount on B/P 441116 To Inter Payable 42 000 5629340 x 5/6 4250000 529340 x 5/ 6 5100000 x 5/6 441116 4691116 31.1.2017 InterestExpense a/c Interest Payable a/c Dr. 938223 Dr. 4250000 To Discount on B/P 88223 To Cash 5100000 5629340 x 1/6 938223 529340 x 1/ 6 88223 31.7.2017 Interest Expense a/c Dr. 5666394 To Discount on B/P 566394 To Cash 5100000 31.12.2017 Interest Expense a/c Dr. 4755034.2 To Discount on B/P 505034 To Interest Payable 4250000 31.1.2021 InterestExpense a/c Interest Payable a/c Dr. 445896 Dr. 4250000 To Discount on B/P 95896 To Cash 4600000

Part 4: Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2021. Barnwell 31.7.2016 Cash a/c Dr. 5100 Discount on B/P Invest a/c Dr. 495 To Interest Revenue 5595 31.12.2016 Interest Receivable a/c Dr. 4250 Disc on Bond Invest a/c Dr. 441 To Revenue 4691 31.1.2017 Cash a/c 5100 Dr. Discount on B/P Invest a/c Dr. 88 To Interest Receivable 4250 To Interest Revenue 938 31.7.2017 Cash a/c 5100 Dr. Discount on B/P Invest a/c To Interest Revenue Dr. 566 5666 31.12.2017 Interest Receivable a/c Disc on Bond Invest a/c Dr. 4250 Dr. 505 To Interest Revenue 4755 31.1.2021 Cash a/c Dr. 5100 Discount on B/P Invest a/c Dr. 101 To Interest Receivable 4250 To Interest Revenue 951