Question

Universal Foods issued 10% bonds, dated January one, with a face amount of 150 million dollars on January 1st 2016. do Bonds mature on December 31st 2030. the market rate of interest for similar issues with 12%. Interest is paid semi-annually on June 30th and December 31st. Universal uses the straight-line method.

1. determine the price of the bond. January 1, 2016.
2. prepare the journal entry to record the issuance by Universal Foods on January 1st 2016
3. prepare the journal entry to record interest on June 30th 2016
4. prepare the journal entry to record interest on December 31st 2023

Answer 1

1) Calculation of price of the bond is shown as follows:-

The price of the bond will be equal to sum of present value of all interest payments and face value of bond at the end of bond life.

Bond Life = 15 years (From 2016 to 2030)

Semi Annual Interest Payments = Face Value of Bond*Interest rate*6/12

= $150 million*10%*6/12 = $7.50 million

Market rate for discounting = 12%*6/12 = 6%

Number of periods = 15 years*2 semiannual periods = 30 periods

Present Value of Interest payments = Interest*PVAF(6%, 30)

= $7.50 million*13.76483 = $103.24 million

Present Value of Face Value at the end = $150 million*PVF(6%, 30)

= $150 million*0.17411 = $26.12 million

Bond Price = PV of Interest Payments+PV of Face Value of Bond

= $103.24 million +$26.12 million = $129.36 million

2) Journal Entry (Amounts in million $)

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2016	Cash	129.36
	Discount on Bonds Payable (150-129.36)	20.64
	Bonds Payable		150
	(To record the issue of bonds)

3) Journal Entry (Amounts in million $)

Date	Account Titles and Explanation	Debit	Credit
Jun 30, 2016	Interest expense (0.69+7.50)	8.19
	Discount on Bonds Payable ($20.64/30 periods))		0.69
	Cash (150 million*5%)		7.50
	(To record interest expense)

4) Journal Entry (Amounts in million $)

Date	Account Titles and Explanation	Debit	Credit
Dec 31, 2023	Interest expense (0.69+7.50)	8.19
	Discount on Bonds Payable ($20.64/30 periods))		0.69
	Cash (150 million*5%)		7.50
	(To record interest expense)