Question

On January 1, 2018, Instaform, Inc., issued 12% bonds with a face amount of $55 million, dated January 1. The bonds mature in 2037 (20 years). The market yield for bonds of similar risk and maturity is 14%. 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 11%. Determine the price of the bonds at January 1, 2018.
2-b. Assume the market rate was 11%. 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.

Answer 1

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Part 1a
Present Value of Face amount	PVF, n=40, i=7	55million*0.066780	$ 3,672,900
Present Value of Interest Amount	PVAF, n=40, i=7	3.3million*13.331709	$43,994,640
(55m*12*6/12)=3.3million
Bond Price as on 1 Jan 2018			$47,667,540
Part 1b
Account	Debit	Credit
Cash	$        47,667,540
Discount on Bond Payable (Plug in)	$           7,332,460
Bond Payable		$                55,000,000
(being bond issued on discount)
Part 2a
Present Value of Face amount	PVF, n=40, i=5.5	55million*0.117463	$ 6,460,465
Present Value of Interest Amount	PVAF, n=40, i=5.5	3.3million*16.046125	$52,952,213
(55m*12*6/12)=3.3million
Bond Price as on 1 Jan 2018			$59,412,678
Part 2b
Account	Debit	Credit
Cash	$        59,412,678
Premium on Bond Payable		$                  4,412,677
Bond Payable		$                55,000,000
(being bond issued on premium)
Part 3
Account	Debit	Credit
Investment in Bond	$        55,000,000
Premium on Bond investment	$           4,412,677
Cash		$                59,412,678