Question

On January 1, 2021, Mania Enterprises issued 12% bonds dated January 1, 2021, with a face amount of $20.3 million. The bonds mature in 2030 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and 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. Round your intermediate calculations to the nearest whole dollar.) Required: 1. Determine the price of the bonds at January 1, 2021. 2. Prepare the journal entry to record the bond issuance by Mania on January 1, 2021. 3. Prepare the journal entry to record interest on June 30, 2021, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2021, using the effective interest method. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Determine the price of the bonds at January 1, 2021. (Enter your answers in whole dollars.) Bond value

Answer 1

1.

For calculating the bond price we need to find out present value of semi annual payment and present value of face value of bond .

Hence face value of bond is $20.30 million , coupon rate 12% , Bond interest to be paid semi annually i.e. 2 times in a year hence 20 times . and Future cash flow semi-annual interest $1.218 million ( $20.30 million x 12%/2). Yearly interest is 12% as we are getting payment twice in a year so divide it by 2 i.ie.6% semi annually .

Below table is showing the present value of semi annual interest payment , where in payment no column we have mention the no of times we will get interest payment , future cash flow given here as calculated above ,discount factor is calculated base of market yield .i.e 10% . formula is (1+0.10)^1 for payment no 1 , (1+0.10)^2 for 2 and so on. Formula used for calculating present value is cashflow/discount factor .

Payment no	Future Cash (in $ million) flow	Discount factor	Present Value(in $ million)
1	1.218	1.1000	1.11
2	1.218	1.2100	1.01
3	1.218	1.3310	0.92
4	1.218	1.4641	0.83
5	1.218	1.6105	0.76
6	1.218	1.7716	0.69
7	1.218	1.9487	0.63
8	1.218	2.1436	0.57
9	1.218	2.3579	0.52
10	1.218	2.5937	0.47
11	1.218	2.8531	0.43
12	1.218	3.1384	0.39
13	1.218	3.4523	0.35
14	1.218	3.7975	0.32
15	1.218	4.1772	0.29
16	1.218	4.5950	0.27
17	1.218	5.0545	0.24
18	1.218	5.5599	0.22
19	1.218	6.1159	0.20
20	1.218	6.7275	0.18
		Present Value	10.37

Present value of cash flow of the bond at end of 10 years = $20.30 million x (1+.10)^20= $3.02 million.

Hence , Bond price is ($10.37 million +$3.02 million) =$13.39 million.

2. Journal Entry of bond issuance is

Cash A/C Dr . $20.30 million

Bond payable A/C Cr $20.30 million.

Here cash received hence debit and bond payable is liability so credit .

3.

Interest on bond on 30th June = $20.30 Million x 12%/2 = $1.218 million

Journal Entry would be

Interest on bond expenses A/c Dr. $1.218 million

Cash A/C Cr. $1.218 million

4.

Interest on bond on 31st December = $20.30 Million x 12%/2 = $1.218 million

Journal Entry would be

Interest on bond expenses A/c Dr. $1.218 million

Cash A/C Cr. $1.218 million