Question

On February 1, 2016, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $85 million. The bonds mature on January 31, 2020 (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 $85,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31.

Required: 1. Determine the price of the bonds issued on February 1, 2016. (Enter your answer in whole dollars.) Price of the bonds

Below is the list of 6 journal entries for the above info.

Below is the list of 6 journal entries for the above info.

Answer 1

Answer

Bond Issue It is reasonable that a bond Present value of bond to be issued Bond Rate Market rate Face Value or Maturity Value Present Value of Bond Market Value mising to pay only 6% interest will sell for discount i.e less than its face value when the market is expecting to earn 8% interest. 6.00%) Semiannual 8.00%) Semiannual 3.00% 4.00% 85,000,000 79,304,150 79,304,150 4 Semiannual Discount 5,695,850 The PV of the Bond-PV of Interests+PV of Bond Maturity Value PV of Interest Rate FV Interest Annuity Fa r-Market Rate 2,550,000 6.73300 PV factor up to 3 decimal places The Present Value of Interest 17,169,150 PV of Bond Maturity Value-Face Value PV factor for N Face Value or Maturity Value PV factor-1/(1+r) 85,000,000 0.73100 PV factor up to 3 decimal places Present Value 62,135,000 Present Value of Bond Round off Amortisation Schedule 79,304,150 79,304,150 Interest Expense previous book value in G) Effective Credit Amortisation of Bond Debit Balance i n balance in Interest rate Discount [C-BI (IncreaseBond Discount bond payable Book Value of Bond Cash Interest P Co n Rate inBalance) Account (Outstanding balance) 1-Feb-16 2,550,000 2,550,000 2,550,000 2,550,000 2,550,000 2,550,000 2,550,000 2,550,000 20,400,000 3,172,166 3,197,053 3,222,935 3,249,852 3,277,846 3,306,960 3,337,238 3,331,800 26,095,850 622,166 647,053 672,935 699,852 727,846 756,960 787,238 781,800 5,695,850 5,695,850 85,000,000 5,073,684 85,000,000 4,426,631 85,000,000 3,753,697 85,000,000 3,053,844 85,000,000 2,325,998 85,000,000 1,569,038 85,000,000 781,80085,000,000 0 85,000,000 79,304,150 79,926,316 80,573,369 81,246,303 81,946,156 82,674,002 83,430,962 84,218,200 85,000,000 31-Jan-17 31-Jul-17 31-Jan-18 31-Jan-19 31-Jul-19

Bond Investments Computation of Present value of bond Bond Rate Market rate Face Value or Ma Market Value Life Discount 6%) Semiannual 3.00% 4.00% 8%) Semiannual 85,000 79,304 Value 4 Semiannual 5,696 1. Calculate the price paid by Franco Ltd. The PV of the Bond-PV of Interests+PV of Bond Maturity Value PV of Interest 2,550 6.733 4.00% Interest Pa ent-Coupon RateFV Annuity Factor-(1-(1+r)A-N) r-Market Rate The Present Value of Interest 17,169 PV of Bond Maturity Value-Face Value PV factor for N Face Value or Maturity Value PV factor-1/(1+r) 85,000 0.731 Present Value 62,135 Present Value of Bond 79,304 Amortisation Schedule for Discount on Bonds Interest Income (Market rate Amortisation *previous book of Bond Debit balance in bond value in G) Discount [C-B] Cash Interest Receipt Effective InterestIncrease in Credit Balance in Bond receivable Book Value of Bond Date Rate FV rate method Balance Discount Account account (outstanding Balance) 1-Feb-16 31-Jul-16 31-Jan-17 31-Jul-17 31-Jan-18 31-Jul-18 31-Jan-19 31-Jul-19 31-Jan-20 2,550 2,550 2,550 2,550 2,550 2,550 2,550 2,550 20,400 5,696 5,074 4,427 3,754 3,054 79,304 79,926 80,573 81,246 81,946 82,674 83,431 84,218 85,000 3,172 3,197 3,223 85,000 622 647 673 700 85,000 85,000 85,000 85,000 85,000 85,000 3,278 3,307 3,337 1,569 782 26,096 5,696

Bond Issue Journal Ent Debit Credit 1-Feb-16 Cash 79,304,150 5,695,850 Discount on Bond Payable Bond Pavable 85,000,000 31-Jul-16 Interest expense 3,172,166 Discount on Bond Payable Cash 622,166 2,550,000 31-Dec-16 Interest expense 2,664,211 Discount on Bond Pavable Interest Pavable (for 5 months) 539,211 2,125,000 1-Jan-17 Interest Pavable 2,125,000 539,211 Discount on Bond Payable Interest expense (reversal entry) 2,664,211 31-Jan-17Interest expense 3,197,053 Discount on Bond Payable Cash 647,053 2,550,000 31-Jul-17Interest expense 3,222,935 Discount on Bond Pavable Cash 672,935 2,550,000 31-Dec-17| Interest expense 2,708,210 Discount on Bond Pavable Interest Pavable (for 5 months) 583,210 2,125,000 1-Jan-18 Interest Pavable 2,125,000 583,210 Discount on Bond Pavable Interest expense (reversal entry) 2,708,210 31-Jan-18 Interest expense 3,249,852 Discount on Bond Pavable Cash 699,852 2,550,000

Bond Investments Journal Ent Date General Journal Debit Credit 1-Feb-16 Investment in Bonds Discount on Bonds Cash (The bonds will be reported on balance sheet at face value minus Discount on bonds 85,000 5,696 79,304 Date 31-Jul-16 General Journal Debit Credit Cash Discount on Bonds Interest Revenue Interest income is recognized 2,550 622 3,172 Interest Receivable Discount on Bonds Interest Revenue 2,125 518 31-Dec-16 2,643 for 5 months 1-Jan-17 Interest Revenue Discount on Bonds Interest Receivable 2,643 518 2,125 reversal en Date General Journal Debit Credit Cash Discount on Bonds Interest Revenue 2,550 647 31-Jan-17 3,197 Cash Discount on Bonds Interest Revenue 2,550 673 31-Jul-17 3,223 Interest Receivable Discount on Bonds Interest Revenue 2,125 583 31-Dec-17 2,708 1-Jan-18 Interest Revenue Discount on Bonds Interest Receivable 2,708 583 2,125 reversal en Cash Discount on Bonds Interest Revenue 31-Jan-18 2,550 700 3,250