On January 1, 2018, Instaform, Inc., issued 10% bonds with a face amount of $49 million,...

On January 1, 2018, Instaform, Inc., issued 10% bonds with a face amount of $49 million, dated January 1. The bonds mature in 2037 (20 years). The market yield for bonds of similar risk and maturity is 12%. Interest is paid semiannually. (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-a. Determine the price of the bonds at January 1, 2018.
1-b. Prepare the journal entry to record their issuance by Instaform.
2-a. Assume the market rate was 9%. Determine the price of the bonds at January 1, 2018.
2-b. Assume the market rate was 9%. Prepare the journal entry to record their issuance by Instaform.
3. Assume Broadcourt Electronics purchased the entire issue in a private placement of the bonds. Using the data in requirement 2, prepare the journal entry to record the purchase by Broadcourt.

Solutions

Expert Solution

(1)(a)-Price of the bonds at January 1, 2018

The Price of the Bond = Present Value of the Coupon payments + Present Value of Face Value

= $24,50,000[PVIFA 6%, 40 Years] + $4,90,00,000[PVIF 6%, 40 Years]

= [$24,50,000 x 15.046296] + [$4,90,00,000 x 0.097222]

= $3,68,63,427 + 47,63,887

= $4,16,27,315

(1)(b)- The journal entry to record their issuance by Instaform

Account Titles and Explanation	Debit ($)	Credit ($)

Cash A/c	4,16,27,315
Discount on Issue of Bond A/c	73,72,685
To Bond Payable A/c		4,90,00,000

Issue Price of Bond = $ 4,16,27,315

Face Value of Bond = $4,90,00,000

Discount on Bond Payable = $ 73,72,685 [$490,00,000 - 4,16,27,315]

(2)(a)-Price of the bonds at January 1, 2018 if the market rate was 9%

The Price of the Bond = Present Value of the Coupon payments + Present Value of Face Value

= $24,50,000[PVIFA 4.50%, 40 Years] + $4,90,00,000[PVIF 4.50%, 40 Years]

= [$24,50,000 x 18.401584] + [$4,90,00,000 x 0.171928]

= $4,50,83,882 + 84,24,506

= $5,35,08,388

(2)(b)- The journal entry to record their issuance by Instaform

Account Titles and Explanation	Debit ($)	Credit ($)

Cash A/c	5,35,08,388
To Premium on Bond Payable A/c		45,08,388
To Bond Payable A/c		4,90,00,000

Issue Price of Bond = $ 5,35,08,388

Face Value of Bond = $4,90,00,000

Premium on Bond Payable = $ 45,08,388 [$5,35,08,388 – 490,00,000]

(3)- The journal entry to record the purchase by Broadcourt

Account Titles and Explanation	Debit ($)	Credit ($)

Investment in Bond A/c	4,90,00,000
Premium on Bond A/c	45,08,388
To Cash A/c		5,35,08,388

ekkarill92 answered 1 year ago

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