Question

1，The Bradford Company issued 10% bonds, dated January 1, with a face amount of $80 million on January 1, 2021.The bonds mature on December 31, 2030 (10 years). For bonds of similar risk and maturity, the market yield is12%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2021.

2. Prepare the journal entry to record their issuance by The Bradford Company on January 1, 2021.

3. Prepare the journal entry to record interest on June 30, 2021 (at the effective rate).

4. Prepare the journal entry to record interest on December 31, 2021 (at the effective rate).

Answer 1

Requirement:1

Price of the bonds at January 1, 2021 is $ 70,824,063

Working:

Present value of interest payments	$ 45,879,684.87
[$80000000*5/100*11.46992 PV annuity factor (6%, 10 years, semi annual bond)]
Present value of the face value	$ 24,944,378.15
[$80000000*0.311805 PV ordinary factor (6%, 10 years)]
Price of the Bonds	$ 70,824,063.03

Requirement:2

Date	Account Titles	Debit	Credit
1/1/2021	Cash	$        70,824,063
	Discount on Bands Payable	$          9,175,937
	Bonds Payable		$   80,000,000
	( To record bonds issue)

Requirement:3

Date	Account Titles	Debit	Credit
6/30/2021	Interest Expense	$          4,249,444
	Discount on Bonds Payable		$         249,444
	Cash		$     4,000,000
	( To record interest expense paid)

Requirement:4

Date	Account Titles	Debit	Credit
12/31/2021	Interest Expense	$          4,264,410
	Discount on Bonds Payable		$         264,410
	Cash		$     4,000,000
	( To record interest expense paid)

Working:

BOND DISCOUNT AMORTIZATION
EFFECTIVE-INTEREST METHOD-ANNUAL INTEREST PAYMENTS
Interest Periods	Cash Paid	Interest Expense	Change in Carrying Value	Carrying Value
1/1/2021				$        70,824,063
6/30/2021	$           4,000,000	$              4,249,444	$             249,444	$        71,073,507
12/31/2021	$           4,000,000	$              4,264,410	$             264,410	$        71,337,917
6/30/2022	$           4,000,000	$              4,280,275	$             280,275	$        71,618,192
12/31/2022	$           4,000,000	$              4,297,092	$             297,092	$        71,915,284
6/30/2023	$           4,000,000	$              4,314,917	$             314,917	$        72,230,201
12/31/2023	$           4,000,000	$              4,333,812	$             333,812	$        72,564,013
6/30/2024	$           4,000,000	$              4,353,841	$             353,841	$        72,917,854
12/31/2024	$           4,000,000	$              4,375,071	$             375,071	$        73,292,925
6/30/2025	$           4,000,000	$              4,397,575	$             397,575	$        73,690,500
12/31/2025	$           4,000,000	$              4,421,430	$             421,430	$        74,111,930
6/30/2026	$           4,000,000	$              4,446,716	$             446,716	$        74,558,646
12/31/2026	$           4,000,000	$              4,473,519	$             473,519	$        75,032,165
6/30/2027	$           4,000,000	$              4,501,930	$             501,930	$        75,534,095
12/31/2027	$           4,000,000	$              4,532,046	$             532,046	$        76,066,141
6/30/2028	$           4,000,000	$              4,563,968	$             563,968	$        76,630,109
12/31/2028	$           4,000,000	$              4,597,807	$             597,807	$        77,227,916
6/30/2029	$           4,000,000	$              4,633,675	$             633,675	$        77,861,590
12/31/2029	$           4,000,000	$              4,671,695	$             671,695	$        78,533,286
6/30/2030	$           4,000,000	$              4,711,997	$             711,997	$        79,245,283
12/31/2030	$           4,000,000	$              4,754,717	$             754,717	$        80,000,000