Question

Universal Foods issued 10% bonds, dated January 1, with a face amount of $170 million on January 1, 2018. The bonds mature on December 31, 2027 (10 years). The market rate of interest for similar issues was 12%. 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, 2018.

2. to 4. Prepare the journal entry to record their issuance by Universal Foods on January 1, 2018, interest on June 30, 2018 and interest on December 31, 2025.

Answer 1

The cash proceeds to be received on issue of bond is calculated below:

= $170,000,000 * PV( 6%,20(Period) + ($170,000,000 * 10% * 6/12) * PVIFA( 6%,20(Period)

= $170,000,000 * 0.3118047 + $8,500,000 *11.4699212

= $53,006,804 + $97,494,330

= $150,501,134

Date	Account and Explanation	Debit ($)	Credit ($)
Jan. 1, 2018	Cash	150,501,134
	Discount on Bond Payble ($170,000,000 -  $150,501,134)	19,498,866
	Bond Payable		170,000,000
	(Recorded the issue of bond payable )
June,30,2018	Interest Expenses ($170,000,000 *10% * 6/12)	9,474,943
	Discount on Bond Payble ($19,498,866 / 20)		974,943
	Cash		8,500,000
	(Recorded the interest payment in cash )
Dec.31, 2025	Interest Expenses ($170,000,000 *10% * 6/12)	9,474,943
	Discount on Bond Payble ($19,498,866 / 20)		974,943
	Cash		8,500,000
	(Recorded the interest payment in cash )