Question

Hello,

I am stuck on sections "Reg 4 Cromley'' and "Reg 4 Barnwell" (see below)

On February 1, 2021. Cromley Motor Products issued 9% bonds, dated February 1, with a face amount of $60 million. The bonds mature on January 31, 2025 (4 years). The market yleld for bonds of similar risk and maturity was 10%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $60,000 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 2-6. 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

Requirement 4 Cromely:

No	Date	General Journal	Debit	Credit
1	July 31,2021	Interest expense	$2,903,053
		Discount on bonds payable		$203,053
		Cash		$2,700,000
2	December 31,2021	Interest expense [58,264,120 x 10% x 5/12]	$2,427,672
		Discount on bonds payable		$177,672
		Interest payable [60,000,000 x 9% x 5/12]		$2,250,000
3	January 31,2022	Interest expense [58,264,120 x 10% x 1/12]	$485,534
		Interest payable	$2,250,000
		Discount on bonds payable		$35,534
		Cash		$2,700,000
4	July 31,2022	Interest expense	$2,923,866
		Discount on bonds payable		$223,866
		Cash		$2,700,000
5	December 31,2022	Interest expense [58,701,193 x 10% x 5/12]	$2,445,883
		Discount on bonds payable		$195,883
		Interest payable [60,000,000 x 9% x 5/12]		$2,250,000
6	January 31,2023	Interest expense [58,701,193 x 10% x 5/12]	$489,177
		Interest payable	$2,250,000
		Discount on bonds payable		$39,177
		Cash		$2,700,000

Requirement 5 Barnwell:

No	Date	General Journal	Debit	Credit
1	July 31,2021	Cash	$2,700
		Discount on investment in bonds	$203
		Interest revenue		$2,903
2	December 31,2021	Interest receivable [60,000 x 9% x 5/12]	$2,250
		Discount on investment in bonds	$178
		Interest revenue [58,264 x 10% x 5/12]		$2,428
3	January 31,2022	Cash	$2,700
		Discount on investment in bonds	$36
		Interest revenue [58,264 x 10% x 1/12]		$486
		Interest receivable		$2,250
4	July 31,2022	Cash	$2,700
		Discount on investment in bonds	$224
		Interest revenue		$2,924
5	December 31,2022	Interest receivable [60,000 x 9% x 5/12]	$2,250
		Discount on investment in bonds	$196
		Interest revenue [58,701 x 10% x 5/12]		$2,446
6	January 31,2023	Cash	$2,700
		Discount on investment in bonds	$39
		Interest revenue		$489
		Interest receivable [58,701 x 10% x 5/12]		$2,250

Calculations:

i.For Cromely,

Semi-annual interest = 60,000,000 x 9% x 1/2 = $2,700,000

Present value of interest payments	$17,450,667
[2,700,000 x 6.46321 present value annuity factor (5%, 8 years)]
Present value of face value	$40,610,400
[60,000,000 x 0.67684 present value factor (5%, 8 years)]
Issue price of the bonds	$58,061,067

Amortization tables:

	Cash paid	Interest expense	Discount amortization	Carrying amount
Feb 1.2021				$58,061,067
July 31,2021	$2,700,000	$2,903,053	$203,053	$58,264,120
Jan 31,2022	$2,700,000	$2,913,206	$213,206	$58,477,326
July 31,2022	$2,700,000	$2,923,866	$223,866	$58,701,193
Jan 31,2023	$2,700,000	$2,935,060	$235,060	$58,936,252
July 31,2023	$2,700,000	$2,946,813	$246,813	$59,183,065
Jan 31,2024	$2,700,000	$2,959,153	$259,153	$59,442,218
July 31,2024	$2,700,000	$2,972,111	$272,111	$59,714,329
Jan 31,2025	$2,700,000	$2,985,716	$285,671	$60,000,000

ii.For Barnwell,

Semi-annual interest = 60,000 x 9% x 1/2 = $2,700

Present value of interest payments	$17,451
[2,700 x 6.46321 present value annuity factor (5%, 8 years)]
Present value of face value	$40,610
[60,000 x 0.67684 present value factor (5%, 8 years)]
Issue price of the bonds	$58,061

Amortization table:

	Cash received	Interest revenue	Discount amortization	Carrying amount
Feb 1.2021				$58,061
July 31,2021	$2,700	$2,903	$203	$58,264
Jan 31,2022	$2,700	$2,913	$213	$58,477
July 31,2022	$2,700	$2,924	$224	$58,701
Jan 31,2023	$2,700	$2,935	$235	$58,936
July 31,2023	$2,700	$2,947	$247	$59,183
Jan 31,2024	$2,700	$2,959	$259	$59,442
July 31,2024	$2,700	$2,972	$272	$59,714
Jan 31,2025	$2,700	$2,986	$286	$60,000