Question

In: Accounting

The Bradford Company issued 12% bonds dated January 1, 2016, with a face amount of $20,000,000...

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).

Solutions

Expert Solution

(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

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