Question

Universal Foods issued 12% bonds, dated January 1, with a face amount of $200 million on January 1, 2018. The bonds mature on December 31, 2027 (10 years). The market rate of interest for similar issues was 14%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. (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 at January 1, 2018. 2. to 4. Prepare the journal entry to record their issuance by Universal Foods on January 1, 2018, interest on June 30, 2018 and interest on December 31, 2025. Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 to 4 Determine the price of the bonds at January 1, 2018. (Enter your answers in whole dollars.) Table values are based on: n 1 = 20 i = 7.0% Cash Flow Amount Interest Principal Price of bonds Present Value < Req 1 Req 2 to 4 >

Answer 1

Correct Answer:

table values are based on:
n =	10	Years
I =	7%
Cash flow	Amount	Present value
Interest	$ 12,000,000	$       127,128,170.95
Principal	$ 200,000,000	$               51,683,801
Price of Bonds		$             178,811,972

requirement 2:

Date	General Journal	Debit	Credit
1/1/2018	Cash	$              178,811,972
	Discount on notes payable	$               21,188,028	$                             21,188,028
	Notes payable		$                          200,000,000
6/30/2018	Interest Expense	$          10,940,598.58
	Discount on notes payable	$             1,059,401.42
	Cash		$                       12,000,000.00
12/31/2025	Interest Expense	$          10,940,598.58
	Discount on notes payable	$             1,059,401.42
	Cash		$                       12,000,000.00

Working:

Semi-Annual		Formula Applied
Face Value of Bond	$     200,000,000
Interest Semi-Annually @ 12%	$       12,000,000	(Face Value of Bonds * Coupon rate ) / 2
Semi-Annual Effective interest Rate r = ( 14%)	0.0700	14.0%
Time Period (n) 10 years	20.00	10
Present Value of Face Value of Bond	$       51,683,801	Face Value/(1+r%)^2n
Present Value of Interest payment	$     127,128,171	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$     178,811,972	PV of Face value of bond + PV of Interest Paid Annually
Discount	$     21,188,028	Issue Price - Face Value of Bonds

Straight Line Bond Amortization = Discount on bond / Bond term

= 21,188,028 / 20 periods.

= 1,059,401.42

End of Answer.

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