Question

3

On February 1, 2021, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $75 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 $75,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31. (FV of S1. PV of $1. EVA of $1. PVA of $1. EVAD 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 2-b. Prepare amortization schedules that indicate Barnwell's effective interest revenue for each interest period during the term to maturity. 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. Complete this question by entering your answers in the tabs below. Reg 1 Req 2A Reg 2B Reg 3 Req 4 Cromley Reg 4 Barnwell Determine the price of the bonds issued on February 1, 2021. (Do not round intermediate calculations. Enter your answer in whole dollars.) Price of the bonds Req2A > < Prey 3 of 4 !!! Next >

Answer 1

Solution:

$5,48,01,750 Requirement 1 Computation of Price of Bonds Issued by Cromley Motor P.V of Bonds issued ($75,000,000 * 0.73069) (Face Value * PVF @4% for 8 payments) P.V of Interest ($2,250,000 * 6.73274) (Semi-annual Interest * PVAF @4% for 8 payments) Price of Bonds Issued $1,51,48,665 $6,99,50,415 $54,802 Computation of Price of Bonds acquired by Barnwell Industries P.V of Bonds issued ($75,000 * 0.73069) (Face Value *PVF @4% for 8 payments) P.V of Interest ($2,250 * 6.73274) (Semi-annual Interest * PVAF @4% for 8 payments) Price of Bonds Acquired $15,148 $69,950

Requirement 2A Cromley Motor Products Amortization Schedule Effective Increase in Cash Payment Interest Balance Payment Number Outstanding Balance (B) (C=E* 4%) (A) 0 (D =C-B) E 1 2 3 4 $22,50,000 $22,50,000 $22,50,000 $22,50,000 $22,50,000 $22,50,000 $22,50,000 $22,50,000 $27,98,017 $28,19,937 $28,42,735 $28,66,444 $28,91,102 $29,16,746 $29,43,416 $29,71,189 $5,48,017 $5,69,937 $5,92,735 $6,16,444 $6,41,102 $6,66,746 $6,93,416 $7,21,189 $6,99,50,415 $7,04,98,432 $7,10,68,369 $7,16,61,104 $7,22,77,548 $7,29,18,650 $7,35,85,396 $7,42,78,811 $7,50,00,000 5 6 7 00

Requirement 2B Barnwell Industries Amortization Schedule Effective Increase in Cash Receipt Interest Balance Payment Number Outstanding Balance (B) (C=E* 4%) (D=C-B) E (A) 0 1 2 3 4 5 6 $2,250 $2,250 $2,250 $2,250 $2,250 $2,250 $2,250 $2,250 $2,798 $2,820 $2,843 $2,866 $2,891 $2,917 $2,943 $2,972 $548 $570 $593 $616 $641 $667 $693 $722 $69,950 $70,498 $71,068 $71,661 $72,277 $72,918 $73,585 $74,278 $75,000 7 00 8

Date Debit Credit Requirement 3 Journal Entries Accounts Titles Feb-1-2021 Cash Discount on Bonds Payable Bonds Payable (Record the issuance of the bonds by Cromley) $6,99,50,415 $50,49,585 $7,50,00,000 $75,000 Feb-1-2021 Investment in Bonds Discount - Investment in Bonds Cash (Record the Bond Investment by Barnwell) $5,050 $69,950

Credit Requirement 4 Cromley Journal Entries Date Accounts Titles July-31-2021 Interest Expense Discount on Bonds Payable Cash (Record the payment of Interest on Bonds) Debit $27,98,017 $5,48,017 $22,50,000 $23,49,948 Dec-31-2021 Interest Expense ($28,19,937 * 5/6) Discount on Bonds Payable Interest Payable ($22,50,000 * 5/6) (Record the accrued interest on Bonds) $4,74,948 $18,75,000 $4,69,989 $18,75,000 Jan-31-2022 Interest Expense ($28,19,937 * 1/6) Interest Payable Discount on Bonds Payable Cash (Record the payment of Interest on Bonds) $94,989 $22,50,000 $28,42,735 July-31-2022 Interest Expense Discount on Bonds Payable Cash (Record the payment of Interest on Bonds) $5,92,735 $22,50,000 $23,88,703 Dec-31-2022 Interest Expense ($28,66,444 * 5/6) Discount on Bonds Payable Interest Payable ($22,50,000 * 5/6) (Record the accrued interest on Bonds) $5,13,703 $18,75,000 $4,77,741 $18,75,000 Jan-31-2023 Interest Expense ($28,66,444 * 1/6) Interest Payable Discount on Bonds Payable Cash (Record the payment of Interest on Bonds) $1,02,741 $22,50,000

Credit Requirement 4 Branwell Journal Entries Date Accounts Titles July-31-2021 Cash Discount - Investment in Bonds Interest Revenue (Record the receipt of interest on bonds) Debit $2,250 $548 $2,798 $1,875 $475 Dec-31-2021 Interest Receivable ($2,250 * 5/6) Discount - Investment in Bonds Interest Revenue ($2,820 * 5/6) (Record the accrued interest on Bonds) $2,350 $2,250 $ $95 Jan-31-2022 Cash Discount - Investment in Bonds Interest Receivable Interest Revenue ($2,820 * 1/6) (Record the receipt of interest on bonds) $1,875 $470 $2,250 $593 July-31-2022 Cash Discount - Investment in Bonds Interest Revenue (Record the receipt of interest on bonds) $2,843 $1,875 $513 Dec-31-2022 Interest Receivable ($2,250 * 5/6) Discount - Investment in Bonds Interest Revenue ($2,866 * 5/6) (Record the accrued interest on Bonds) $2,388 Jan-31-2023 Cash $2,250 $103 Discount - Investment in Bonds Interest Receivable Interest Revenue ($2,866* 1/6) (Record the receipt of interest on bonds) $1,875 $478