Question

On January 1, 2021, Instaform, Inc., issued 12% bonds with a face amount of $60 million, dated January 1. The bonds mature in 2040 (20 years). The market yield for bonds of similar risk and maturity is 14%. Interest is paid semiannually. (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-a. Determine the price of the bonds at January 1, 2021. 1-b. Prepare the journal entry to record their issuance by Instaform. 2-a. Assume the market rate was 11%. Determine the price of the bonds at January 1, 2021. 2-b. Assume the market rate was 11%. Prepare the journal entry to record their issuance by Instaform. 3. Assume Broadcourt Electronics purchased the entire issue in a private placement of the bonds. Using the data in requirement 2, prepare the journal entry to record the purchase by Broadcourt.

Answer 1

Solution 1a:

Computation of bond price
Table values are based on:
n=	40
i=	7.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.06678	$60,000,000.00	$4,006,800
Interest (Annuity)	13.33171	$3,600,000.00	$47,994,156
Price of bonds			$52,000,956

Solution 1b:

Journal Entries - Instaform Inc.
Event	Particulars	Debit	Credit
1-Jan-21	Cash Dr	$52,000,956.00
	Discount on issue of bond Dr	$7,999,044.00
	To Bond Payable		$60,000,000.00
	(To record issue of bond at discount)

Solution 2a:

Computation of bond price
Table values are based on:
n=	40
i=	5.50%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.11746	$60,000,000.00	$7,047,600
Interest (Annuity)	16.04612	$3,600,000.00	$57,766,032
Price of bonds			$64,813,632

Solution 2b:

Journal Entries - Instaform Inc.
Date	Particulars	Debit	Credit
1-Jan-21	Cash Dr	$64,813,632.00
	To Bond Payable		$60,000,000.00
	To Premium on Bond Payable		$4,813,632.00
	(To record issue of bond at premium)

Solution 3:

Journal Entries - Broadcourt Electronics
Date	Particulars	Debit	Credit
1-Jan-21	Investment in Bond Dr	$60,000,000.00
	Premium on bond investment Dr	$4,813,632.00
	To Cash		$64,813,632.00
	(To record investment in bond)