Question

In: Accounting

On January 1, 2018, Instaform, Inc., issued 10% bonds with a face amount of $50 million,...

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.

Solutions

Expert Solution

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

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