Question

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).

Answer 1

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)