Question

On February 1, 2021, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $70 million. The bonds mature on January 31, 2025 (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 $70,000 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.

Payment Number Cash Payment Effective Interest Increase in Balance Outstanding Balance 1 2 3 4 5 6 7 8 Totals

2-b. Prepare amortization schedules that indicate Barnwell’s effective interest revenue for each interest period during the term to maturity.

	Payment Number Cash Payment Effective Interest Increase in Balance Outstanding Balance 1 2 3 4 5 6 7 8 Totals

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

	Coupon Rate per period	3%
	Period	8
	Effective/Market rate per period	4.0%
	Bond amount	$70,000,000
		Period	Cashflows	Present value	Calculation
		1	$2,100,000	$2,019,231	(2100000/(1+0.04)^1)
		2	$2,100,000	$1,941,568	(2100000/(1+0.04)^2)
		3	$2,100,000	$1,866,892	(2100000/(1+0.04)^3)
		4	$2,100,000	$1,795,089	(2100000/(1+0.04)^4)
		5	$2,100,000	$1,726,047	(2100000/(1+0.04)^5)
		6	$2,100,000	$1,659,661	(2100000/(1+0.04)^6)
		7	$2,100,000	$1,595,827	(2100000/(1+0.04)^7)
		8	$72,100,000	$52,682,764	(72100000/(1+0.04)^8)
1	Selling price of bonds			$65,287,079
2 (a)	Payment Number	Cash payment	Effective interest	Increase in balance	Oustanding balance
	1	$2,100,000	$2,611,483	$511,483	$65,798,562
	2	$2,100,000	$2,631,942	$531,942	$66,330,504
	3	$2,100,000	$2,653,220	$553,220	$66,883,724
	4	$2,100,000	$2,675,349	$575,349	$67,459,073
	5	$2,100,000	$2,698,363	$598,363	$68,057,436
	6	$2,100,000	$2,722,297	$622,297	$68,679,734
	7	$2,100,000	$2,747,189	$647,189	$69,326,923
	8	$72,100,000	$2,773,077	-$69,326,923	$0
	Totals	$86,800,000	$21,512,921
2 (b)	Payment Number	Cash payment	Effective interest	Increase in balance	Oustanding balance
	1	2100	$2,611	$511	$65,799
	2	2100	$2,632	$532	$66,331
	3	2100	$2,653	$553	$66,884
	4	2100	$2,675	$575	$67,459
	5	2100	$2,698	$598	$68,057
	6	2100	$2,722	$622	$68,680
	7	2100	$2,747	$647	$69,327
	8	72100	$2,773	-$69,327	$0
	in books of Barnwell
3	Account titles and explanation	Debit	Credit
	Investment in bonds	$65,287
	Cash		$65,287
	(Investment in bonds made)
Journal entry in books of Cromley
4	Account titles and explanation	Debit	Credit
01-Feb-21	Cash	$65,287,079
	Discount on bonds payable	$4,712,921
	Bonds payable		$70,000,000
	(Bonds issued at discount)
31-Jul-21	Interest expense	$2,611,483
	Discount on bonds payable		$511,483
	Cash		$2,100,000
	(interest expense booked for first payment)
31-Jan-22	Interest expense	$2,631,942
	Discount on bonds payable		$531,942
	Cash		$2,100,000
	(interest expense booked for second payment)
31-Jul-22	Interest expense	$2,653,220
	Discount on bonds payable		$553,220
	Cash		$2,100,000
	(interest expense booked for second payment)
31-Jan-23	Interest expense	$2,675,349
	Discount on bonds payable		$575,349
	Cash		$2,100,000
	(interest expense booked for second payment)
Journal entry in Barnwells
31-Jul-21	Cash	$2,100
	Investment in bonds	$511
	Interest income		$2,611
31-Jan-22	Cash	$2,100
	Investment in bonds	$532
	Interest income		$2,632
31-Jul-22	Cash	$2,100
	Investment in bonds	$553
	Interest income		$2,653
31-Jan-23	Cash	$2,100
	Investment in bonds	$575
	Interest income		$2,675