In: Accounting
The Bradford Company issued 12% bonds dated January 1, 2016, with a face amount of $20,000,000 on January 1, 2016. The bonds mature on December 31, 2025 (10 years). For bonds of similar risk and maturity the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1)
Required:
A. Determine the price of the bonds at January 1, 2016.
B. Prepare the journal entry to record their issuance by The Bradford Company on January 1, 2016.
C. Prepare the journal entry to record interest on June 30, 2016 (at effective interest rate).
D. Prepare the journal entry to record interest on December 31, 2016 (at effective interest rate).
(note there will be slight difference in issue price calculation ,kindly use the factors as given | ||||||||
inn your question to get exact answer) | ||||||||
Bond characterstics | Amount | |||||||
1-a) | Principal | 20,000,000 | ||||||
interest | 1,200,000 | |||||||
Market interest rate | 5% | |||||||
periods to maturity | 20 | |||||||
issue price | 22,492,452 | |||||||
Calculation of bond issue price | ||||||||
Where | ||||||||
i= | 5.00% | |||||||
t= | 20 | |||||||
principal | * | PV of $1 at 5% for 20 yrs = | ||||||
20,000,000 | * | 0.37689 | = | 7537800 | ||||
interest | * | PV of ordinary annuity at 5%= | ||||||
1200000 | * | 12.46221 | = | 14954652 | ||||
bond issue price | 22492452 |
Date | Account titles & Explanations | Debit | Credit | |||
1/1/2018 | Cash | 22,492,452 | ||||
premium on bonds | 2,492,452 | |||||
bonds payable | 20,000,000 | |||||
6/30/208 | interest expense | 1,124,623 | ||||
premium on bonds | 75,377 | |||||
cash | 1,200,000 | |||||
12/31/2018 | ||||||
interest expense | 1,120,854 | |||||
premium on bonds | 79,146 | |||||
cash | 1,200,000 | |||||