Question

On January 1, 2021, Instaform, Inc., issued 12% bonds with a face amount of $45 million, dated January 1. The bonds mature in 2040 (20 years). The market yield for bonds of similar risk and maturity is 14%. 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, 2021.
1-b. Prepare the journal entry to record their issuance by Instaform.
2-a. Assume the market rate was 11%. Determine the price of the bonds at January 1, 2021.
2-b. Assume the market rate was 11%. 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.

Please answer all questions from Req1A, 1B,2A,2B and Req3. Thank you.

Answer 1

1.a Determine the price of the bonds at January 1, 2021.

Determine the price of the bonds at January 1, 2021

Semi annual cash intrest = 45,000,000*12%*6/12

= 2,700,000

Due at maturity = 45,000,000

Present value of intrest = 40 payments @ 7%

Present value intrest factor Annuity(40 periods, 7%) = 13.332

Present Value of intrest = 2,700,000*13.332

= 35,996,400

Present value intrest factor (40th period, 7%) = 0.0668

Present value of 45,000,000 (40th period, 7%) =45,000,000*0.0668 = 3,006,000

Price of the bonds = 35,996,400 + 3,006,000

Price of the bonds = 39,002,400

1-b. Journal entry.

Cash A/c dr...........................................39,002,400

Discount on Bonds Payable A/c dr.........5,997,600

To Bonds Payable A/c cr.......................................45,000,000

2-a. Assume the market rate was 11%. Determine the price of the bonds at January 1, 2021.

Semi annual cash intrest = 45,000,000*12%*6/12

= 2,700,000

Due at maturity = 45,000,000

Present value of intrest = 40 payments @5.5%

Present value intrest factor Annuity(40 periods, 5.5%) = 16.04612

Present Value of intrest = 2,700,000*16.04612

= 43,324,524

Present value intrest factor (40 periods,@ 5.5%) = 0.11746

Present value of 45,000,000 (40th period, 5.5%) = 45,000,000*0.11746 = 5,285,700

Price of the bonds = 43,324,524 + 5,285,700

Price of the bonds = 48,610,224

2-b. Journal entry.

Cash A/c dr...........................................48,610,224

To Bonds Payable A/c cr.......................................45,000,000

To Premium on bonds payable A/c cr................... 3,610,224

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

Semi annual cash intrest = 45,000,000*12%*6/12

= 2,700,000

Due at maturity = 45,000,000

Present value of intrest = 40 payments @5.5%

Present value intrest factor Annuity(40 periods, 5.5%) = 16.04612

Present Value of intrest = 2,700,000*16.04612

= 43,324,524

Present value intrest factor (40 periods,@ 5.5%) = 0.11746

Present value of 45,000,000 (40th period, 5.5%) = 45,000,000*0.11746 = 5,285,700

Price of the bonds = 43,324,524 + 5,285,700

Price of the bonds = 48,610,224

Journal entry.

Investment in bonds A/c dr...........................................45,000,000

Premium on Investment in bonds A/c dr................... ...3,610,224

To Bonds Payable A/c cr.............................................................48,610,224