3.The Bradford Company issued
3.The Bradford Company issued 10% bonds, dated January 1, with aface amount of $80 million on January 1, 2021.The bonds mature onDecember 31, 2030 (10 years). For bonds of similar risk andmaturity, the market yield is12%. Interest is paid semiannually onJune 30 and December 31.
Required:
1. Determine the price of the bonds at January 1, 2021.
2. Prepare the journal entry to record their issuance by TheBradford Company on January 1, 2021.
3. Prepare the journal entry to record interest on June 30, 2021(at the effective rate).
4. Prepare the journal entry to record interest on December 31,2021 (at the effective rate).
Answer:
| Semi annual cash interest =80000,000*10%*6/12 = | 4000000 | |||||
| n = 20 | ||||||
| I = 6% | ||||||
| Cashflows | Amount | PVF | Present value | |||
| Semi annual cash flows | 40,00,000 | 11.47 | 45880000 | |||
| Maturity value | 8,00,00,000 | 0.312 | 2,49,60,000 | |||
| Price of bonds | 7,08,40,000 | |||||
| Amort Chart: | ||||||
| Date | Cash Int | Int. exp | Disc. Amort | Unamort. Disc. | Carrying value | |
| 01.01.21 | 91,60,000 | 7,08,40,000 | ||||
| 30.06.21 | 40,00,000 | 4250400 | 2,50,400 | 89,09,600 | 7,10,90,400 | |
| 31.12.21 | 40,00,000 | 4265424 | 2,65,424 | 86,44,176 | 7,13,55,824 | |
| Journal entries | ||||||
| Date | Accounts title andexplanations | Debit $ | Credit $ | |||
| a. | Cash account | 7,08,40,000 | ||||
| Discount on bonds payable | 91,60,000 | |||||
| Bondspayable | 8,00,00,000 | |||||
| (for bonds issued) | ||||||
| b. | Interest expenses | 42,50,400 | ||||
| Cashaccount | 40,00,000 | |||||
| Discount onbonds payable | 2,50,400 | |||||
| (for interest expense) | ||||||
| c. | Interest expenses | 42,65,424 | ||||
| Cashaccount | 40,00,000 | |||||
| Discount onbonds payable | 2,65,424 | |||||
| (for interest expense) | ||||||
"Our Prices Start at $11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!"
