Question

In: Accounting

3.The Bradford Company issued 10% bonds, dated January 1, with a face amount of $80 million...

3.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).

Solutions

Expert Solution

Semi annual cash interest = 80000,000*10%*6/12 = 4000000
n = 20
I = 6%
Cashflows Amount PVF Present value
Semi annual cash flows 40,00,000 11.47 45880000
Maturity value 8,00,00,000 0.312 2,49,60,000
Price of bonds 7,08,40,000
Amort Chart:
Date Cash Int Int. exp Disc. Amort Unamort. Disc. Carrying value
01.01.21 91,60,000 7,08,40,000
30.06.21 40,00,000 4250400 2,50,400 89,09,600 7,10,90,400
31.12.21 40,00,000 4265424 2,65,424 86,44,176 7,13,55,824
Journal entries
Date Accounts title and explanations Debit $ Credit $
a. Cash account 7,08,40,000
Discount on bonds payable 91,60,000
    Bonds payable 8,00,00,000
(for bonds issued)
b. Interest expenses 42,50,400
     Cash account 40,00,000
     Discount on bonds payable 2,50,400
(for interest expense)
c. Interest expenses 42,65,424
     Cash account 40,00,000
     Discount on bonds payable 2,65,424
(for interest expense)

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