Question

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On January 1, 2018, Instaform, Inc., issued 14% bonds with a face amount of $50 million,...

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.

  • Req 1A
  • Req 1B
  • Req 2A
  • Req 2B
  • Req 3

Determine the price of the bonds at January 1, 2018. (Enter your answer in whole dollars.)

1A
Price of the bonds

2B

repare the journal entry to record their issuance by Instaform. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

2A

Assume the market rate was 12%. Determine the price of the bonds at January 1, 2018. (Enter your answer in whole dollars.)

Price of the bonds

2B

ransaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

Solutions

Expert Solution

1-a. Determine the price of the bonds at January 1, 2018.
Face Value $       5,00,00,000.00 Million
Semiannual Coupon Rate = 14%/2 7%
Semiannual Coupon Payment $          35,00,000.00
Period = 20 x 2 40
Rate = 16%/2 8%
Present value of an ordinary annuity of $1:n= 40,i= 8% PVOA (8%, 40) 11.92500
Present value of $1:n= 40,i= 8% ,PV(8%,40) 0.04600
Present value of Coupon Payments = $3,500,000 x PVOA(8%,40) $ 4,17,37,500.00000
Present value of Principal = $50,000,000 x PV(8%,40) $        23,00,000.000
Price of the bonds at January 1, 2018 $ 4,40,37,500.00000
1-b. Prepare the journal entry to record their issuance by Instaform.
Cash $ 4,40,37,500.00000
Discount on Bonds Payable $          59,62,500.00
                Bonds Payable $     5,00,00,000.00
2-a. Assume the market rate was 12%. Determine the price of the bonds at January 1, 2018.
Face Value $       5,00,00,000.00 Million
Semiannual Coupon Rate = 14%/2 7%
Semiannual Coupon Payment $          35,00,000.00
Period = 20 x 2 40
Rate = 12%/2 6%
Present value of an ordinary annuity of $1:n= 40,i= 6% PVOA (6%, 40) 15.04600
Present value of $1:n= 40,i= 6% ,PV(6%,40) 0.09720
Present value of Coupon Payments = $3,500,000 x PVOA(6%,40) $ 5,26,61,000.00000
Present value of Principal = $50,000,000 x PV(6%,40) $        48,60,000.000
Price of the bonds at January 1, 2018 $ 5,75,21,000.00000
2-b. Prepare the journal entry to record their issuance by Instaform.
Cash $       5,75,21,000.00
               Premium on Bonds Payable $        75,21,000.00
                Bonds Payable $     5,00,00,000.00
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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

Investment in Bonds

$       5,00,00,000.00
Premium on Bonds Payable $          75,21,000.00
Cash $     5,75,21,000.00

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