Question

Problem 14-1 Determining the price of bonds; discount and premium; issuer and investor [LO14-2]

On January 1, 2018, Instaform, Inc., issued 14% bonds with a face amount of $50 million, dated January 1. The bonds mature in 2037 (20 years). The market yield for bonds of similar risk and maturity is 16%. Interest is paid semiannually. (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-a. Determine the price of the bonds at January 1, 2018.
1-b. Prepare the journal entry to record their issuance by Instaform.
2-a. Assume the market rate was 12%. Determine the price of the bonds at January 1, 2018.
2-b. Assume the market rate was 12%. Prepare the journal entry to record their issuance by Instaform.
3. Assume Broadcourt Electronics purchased the entire issue in a private placement of the bonds. Using the data in requirement 2, prepare the journal entry to record the purchase by Broadcourt.

• Required 1
• Required 2
• Required 3
• Required 4

Determine the price of the bonds at January 1, 2018. (Round your answer to 2 decimal places.)

	Bond value $

Prepare the journal entry to record the bond issuance by Bishop on January 1, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to 2 decimal places.)

No	Date	General Journal	Debit	Credit
1	January 01, 2018

• ecord the interest on June 30, 2018, using the effective interest method.

Note: Enter debits before credits.

	Date General Journal Debit Credit June 30, 2018

• Record the interest on December 31, 2018, using the effective interest method.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2018

Answer 1

Solution 1a:

Computation of bond price
Table values are based on:
n=	40
i=	8.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.04603	$50,000,000.00	$2,301,547
Interest (Annuity)	11.92461	$3,500,000.00	$41,736,147
Price of bonds			$44,037,693

Solution 1b:

Journal Entries -Instaform
Date	Particulars	Debit	Credit
1-Jan-18	Cash Dr	$44,037,693.00
	Discount on issue of bond Dr	$5,962,307.00
	To Bond Payable		$50,000,000.00
	(To record issue of bond at discount)

Solution 2a:

Computation of bond price
Table values are based on:
n=	40
i=	6.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.09722	$50,000,000.00	$4,861,109
Interest (Annuity)	15.04630	$3,500,000.00	$52,662,039
Price of bonds			$57,523,148

Solution 2b:

Journal Entries -Instaform
Date	Particulars	Debit	Credit
1-Jan-18	Cash Dr	$57,523,148.00
	To Bond Payable		$50,000,000.00
	To Premium on Bond Payable		$7,523,148.00
	(To record issue of bond at Premium)

Solution 3:

Journal Entries - Broadcourt Electronics
Date	Particulars	Debit	Credit
1-Jan-18	Investment in Bond Dr	$50,000,000.00
	Premium on bond investment Dr	$7,523,148.00
	To Cash		$57,523,148.00
	(To record bond investment)