Question
In: Accounting
On January 1, 2018, Instaform, Inc., issued 12% bonds with a face amount of $75 million,...
On January 1, 2018, Instaform, Inc., issued 12% bonds with a face amount of $75 million, dated January 1. The bonds mature in 2037 (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, 2018. 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, 2018. 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.
Solutions
Expert Solution
Solution 1a:
| Computation of bond price | |||
| Table values are based on: | |||
| n= | 40 | ||
| i= | 7.00% | ||
| Cash flow | Table Value | Amount | Present Value |
| Par (Maturity) Value | 0.06678 | $75,000,000.00 | $5,008,500 |
| Interest (Annuity) | 13.33171 | $4,500,000.00 | $59,992,695 |
| Price of bonds | $65,001,195 | ||
Solution 1b:
| Journal Entries - Instaform Inc. | |||
| Event | Particulars | Debit | Credit |
| 1-Jan-18 | Cash Dr | $65,001,195.00 | |
| Discount on issue of bond Dr | $9,998,805.00 | ||
| To Bond Payable | $75,000,000.00 | ||
| (To record issue of bond at discount) | |||
Solution 2a:
| Computation of bond price | |||
| Table values are based on: | |||
| n= | 40 | ||
| i= | 5.50% | ||
| Cash flow | Table Value | Amount | Present Value |
| Par (Maturity) Value | 0.11746 | $75,000,000.00 | $8,809,500 |
| Interest (Annuity) | 16.04612 | $4,500,000.00 | $72,207,540 |
| Price of bonds | $81,017,040 | ||
Solution 2b:
| Journal Entries - Instaform Inc. | |||
| Date | Particulars | Debit | Credit |
| 1-Jan-18 | Cash Dr | $81,017,040.00 | |
| To Bond Payable | $75,000,000.00 | ||
| To Premium on Bond Payable | $6,017,040.00 | ||
| (To record issue of bond at premium) | |||
Solution 3:
| Journal Entries | |||
| Event | Particulars | Debit | Credit |
| 1-Jan-16 | Bond investment Dr | $75,000,000.00 | |
| Premium on bond Dr | $6,017,040.00 | ||
| To Cash | $81,017,040.00 | ||
| (To record investment in bond) | |||
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