Question

P 14-5 Issuer and Investor; effective interest: amortization schedule; adjusting entries .LO14-2 On February 1, 2021, Cromley Motor Products issued 9% bonds, dated February 1, with a face amount of $80 million. The bonds mature on January 31, 2025 (4 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $80,000 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, 2021. 2. Prepare amortization schedules that indicate (a) Cromley's effective interest expense and (b) Barnwell's effec- tive interest revenue for each interest period during the term to maturity. 3. Prepare the journal entries to record (a) the issuance of the bonds by Cromley and (b) 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

1)
Cromley
Calculate cash proceeds on issuance:
Maturity value of bonds payable = FV	$              80,000,000.00
Market Interest Rate semiannual =Rate = 9%/2	4.50%
N = 4 years x 2	8
PMT = $80,000,000 x 9%/2	$                3,200,000.00
Type	0
Present Value = PV(5%,8,-$3200000,-80000000,0)	$                   77,361,646
Bonds Payable	$              80,000,000.00
Less:Present Value of Bonds	$                   77,361,646
Discount on Bonds Payable	$                     2,638,354
Barnwell
Barnwell purchased 80,000 ÷80,000,000 = 0.1% of the bonds.
Present Value =84,183,109 x 0.1%	$                     77,361.65
2)
Cromley
Schedule of Bond Discount Amortization
Effective-Interest Method
9% Bonds Sold to Yield 10%
Date	Cash Payment	Effective Interest Expense = Carrying Amount x 5%	Discount Amortized = Int. exp - Cash paid	Carrying Amount of Bonds = Previous bal + Discount amortized
				$        77,361,646
1	$                     3,200,000	$        3,481,274	$               281,274	$        77,642,920
2	$                     3,200,000	$        3,493,931	$               293,931	$        77,936,851
3	$                     3,200,000	$        3,507,158	$               307,158	$        78,244,009
4	$                     3,200,000	$        3,520,980	$               320,980	$        78,564,990
5	$                     3,200,000	$        3,535,425	$               335,425	$        78,900,414
6	$                     3,200,000	$        3,550,519	$               350,519	$        79,250,933
7	$                     3,200,000	$        3,566,292	$               366,292	$        79,617,225
8	$                     3,200,000	$        3,582,775	$               382,775	$        80,000,000
Total	$                   25,600,000	$      28,238,354	$            2,638,354
Barnwell
Schedule of Bond Discount Amortization
Effective-Interest Method
9% Bonds Sold to Yield 10%
Date	Cash Receipt	Effective Interest Expense = Carrying Amount x 5%	Discount Amortized = Int. exp - Cash paid	Carrying Amount of Bonds = Previous bal + Discount amortized
				$          77,361.65
1	$                       3,200.00	$          3,481.27	$                 281.27	$          77,642.92
2	$                       3,200.00	$          3,493.93	$                 293.93	$          77,936.85
3	$                       3,200.00	$          3,507.16	$                 307.16	$          78,244.01
4	$                       3,200.00	$          3,520.98	$                 320.98	$          78,564.99
5	$                       3,200.00	$          3,535.42	$                 335.42	$          78,900.41
6	$                       3,200.00	$          3,550.52	$                 350.52	$          79,250.93
7	$                       3,200.00	$          3,566.29	$                 366.29	$          79,617.22
8	$                       3,200.00	$          3,582.78	$                 382.78	$          80,000.00
Total	$                     25,600.00	$        28,238.35	$              2,638.35
3) Prepare the journal entries to record (a) the issuance of the bonds by Cromley and (b) Barnwell’s investment on February 1, 2021
Account Titles & Explanation	Debit	Credit
Cromley:
Cash	$              77,361,645.57
Discount on Bonds Payable	$                2,638,354.43
Bonds Payable		$      80,000,000
Barnwell:
Investment in Bonds	$                          80,000
Discount on bond investment		$               2,638
Cash		$             77,362
4)
Part 4: Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2023
Cromley
Date	Account Titles  and Explanation	Debit	Credit
31-Jul-21	Interest  Expenses	$   3,481,274.05
	Discount on Bonds Payable		$          281,274.05
	Cash		$       3,200,000.00
31-Dec-21	Interest  Expenses	$   2,911,609.49
	Discount on Bonds Payable		$          244,942.82
	Interest Payable		$       2,666,666.67
Jan 31,2022	Interest  Expenses	$      582,321.90
	Interest Payable	$   2,666,666.67
	Discount on Bonds Payable		$            48,988.56
	Cash		$       3,200,000.00
31-Jul-22	Interest  Expenses	$   3,507,158.30
	Discount on Bonds Payable		$          307,158.30
	Cash		$       3,200,000.00
31-Dec-22	Interest  Expenses	$   2,934,150.35
	Discount on Bonds Payable		$          267,483.68
	Interest Payable		$       2,666,666.67
Jan 31,2023	Interest  Expenses	$      586,830.07
	Interest Payable	$   2,666,666.67
	Discount on Bonds Payable		$            53,496.74
	Cash		$       3,200,000.00
Barnwell
Date	Account Titles  and Explanation	Debit	Credit
31-Jul-21	Cash	$          3,200.00
	Discount  on Bond Investment	$             281.27
	Interest Revenue		$              3,481.27
31-Dec-21	Interest Receivable	$          2,666.67
	Discount on Bond Investment	$             244.94
	Interest Revenue		$              2,911.61
Jan 31,2022	Cash	$          3,200.00
	Discount  on Bond Investment	$               48.99
	Interest Revenue		$                 582.32
	Interest Receivable		$              2,666.67
31-Jul-22	Cash	$          3,200.00
	Discount  on Bond Investment	$             307.16
	Interest Revenue		$              3,507.16
31-Dec-22	Interest Receivable	$          2,666.67
	Discount on Bond Investment	$             267.48
	Interest Revenue		$              2,934.15
Jan 31,2023	Cash	$          3,200.00
	Discount  on Bond Investment	$               53.50
	Interest Revenue		$                 586.83
	Interest Receivable		$              2,666.67