Question

On February 1, 2021, Cromley Motor Products issued 8% bonds, dated February 1, with a face amount of $90 million. The bonds mature on January 31, 2025 (4 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $90,000 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.

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

Answer 1

1. Price of the bonds on February 1, 2021: $ 84,183,156

Maturity amount : $ 90 million

Semiannual coupon = $ 90 million x 8 % x 1/2 = $ 3.6 million.

n = 4 years x 2 = 8

i = 10 % x 1/2 = 5 % or 0.05

PVA _{5 %, n=8} = [ { 1 - ( 1 / 1 + i ) ⁿ } / i ] = [ { 1 - ( 1 / 1.05 ) ⁸ } / 0.05 ] = 6.46321

PV _{5 %, n=8} = ( 1 / 1.05 ) ⁸ = 0.67684

Present value of the bonds = $ 3,600,000 x 6.46321 + $ 90,000,000 x 0.67684 = $ 23,267,556 + $ 60,915,600 = $ 84,183,156

2-a. For Cromwell :

Semiannual Period ending	Amount Paid	Interest Expense	Amortization of Discount	Unamortized Discount	Bonds Payable Carrying Value
February 1, 2021				5,816,844	84,183,156
July 31, 2021	3,600,000	4,209,158	609,158	5,207,686	84,792,314
January 31, 2022	3,600,000	4,239,616	639,616	4,568,070	85,431,930
July 31, 2022	3,600,000	4,271,597	671,597	3,896,473	86,103,527
January 31, 2023	3,600,000	4,305,176	705,176	3,191,297	86,808,703
July 31, 2023	3,600,000	4,340,435	740,435	2,450,862	87,549,138
January 31, 2024	3,600,000	4,377,457	777,457	1,673,405	88,326,595
July 31, 2024	3,600,000	4,416,330	816,330	857,075	89,142,925
January 31, 2025	3,600,000	4,457,075	857,075	0	90,000,000

2-b : For Barnwell :

Semiannual Period ending	Amount Paid	Interest Revenue	Amortization of Premium	Unmortized Premium	Carrying Value of Bonds Receivable
February 1, 2021				5,817	84,183
July 31, 2021	3,600	4,209	609	5,208	84,792
January 31, 2022	3,600	4,240	640	4,568	85,432
July 31, 2022	3,600	4,272	672	3,896	86,104
January 31, 2023	3,600	4,305	705	3,191	86,809
July 31, 2023	3,600	4,340	740	2,451	87,549
January 31, 2024	3,600	4,377	777	1,674	88,326
July 31, 2024	3,600	4,416	816	858	89,142
January 31, 2025	3,600	4,458	858	0	90,000

3. In the books of Cromley Motor Products :

Date	Account Titles	Debit	Credit
		$	$
February 1, 2021	Cash	84,183,156
	Discount on Bonds Payable	5,816,844
	Bonds Payable		90,000,000

In the books of Barnwell :

Date	Account Titles	Debit	Credit
		$	$
February 1, 2021	Bond Investment	90,000
	Premium on Bonds Receivable		5,817
	Cash		84,183