Question

On January 1, 2018, Instaform, Inc., issued 10% 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 12%. 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 9%. Determine the price of the bonds at January 1, 2018.
2-b. Assume the market rate was 9%. 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.

Answer 1

1a)

	Amount	PV Factor	Total
Present Value of Interest	2,500,000.0000	15.0463	37,615,750.0000
Present Value of Bonds Maturity Value	50,000,000.0000	0.09722	4,861,000.0000
Price of bonds			42,476,750.0000

1b)

General Journal	Debit	Credit
Cash	42,476,750.00
Discount on Bonds	7,523,250.00
Bonds Payable		50,000,000.00

2a)

	Amount	PV Factor	Total
Present Value of Interest	2,500,000.00	18.4016	46,003,950.00
Present Value of Bonds Maturity Value	50,000,000.00	0.17193	8,596,500.00
Price of bonds			54,600,450.00

2b)

General Journal	Debit	Credit
Cash	54,600,450.00
Premium on Bonds		4,600,450.00
Bonds Payable		50,000,000.00

3)

General Journal	Debit	Credit
Investment in Bonds	50,000,000.00
Premium on Bonds	4,600,450.00
Cash		54,600,450.00