Question

Universal Foods issued 12% bonds, dated January 1, with a face amount of $200 million on January 1, 2021. The bonds mature on December 31, 2030 (10 years). The market rate of interest for similar issues was 14%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. (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. Determine the price of the bonds at January 1, 2021.
2. to 4. Prepare the journal entries to record their issuance by Universal Foods on January 1, 2021, interest on June 30, 2021 and interest on December 31, 2028.

Answer 1

1.

Computation of Price of Bond

Price of Bond = PV of Interest Payment for 10 year + PV of Face value at end of year 10

= (Half yearly Interest Amount X Cumm PVF @7% for 20) + ( Face value X PVF@14% at 10)

=($200 X 6% X 10.594) + ($200 X 0.50835)

= $228.798 million

....