Question

On February 1, 2018, Cromley Motor Products issued 12% bonds, dated February 1, with a face amount of $65 million. The bonds mature on January 31, 2022 (4 years). The market yield for bonds of similar risk and maturity was 14%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $65,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31. (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 issued on February 1, 2018.
2-a. Prepare amortization schedules that indicate Cromley’s effective interest expense for each interest period during the term to maturity.
2-b. Prepare amortization schedules that indicate Barnwell’s effective interest revenue for each interest period during the term to maturity.
3. Prepare the journal entries to record the issuance of the bonds by Cromley and Barnwell’s investment on February 1, 2018.
4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2020.

Answer 1

Answer 1.
Table Value Based on
n=	8	(4 Year X 2)
i=	7.00%	(14% / 2)
Cash Flow	Amount	Present Value
Interest - $65,000,000 X 12% X 6/12	3,900,000	23,288,064
		($8,000 X 5.97130)
Principal	65,000,000	37,830,592
		($65,000,000 X 0.58201)
Issue Price of Bonds		61,118,656
Discount on issue of Bonds		3,881,344

Answer 2-a.
Cromley Motor Products
Bond Discount Amortization Schedule
Date	Interest Paid - $65,000,000 X 12%X6/12	Interest Expense - Preceeding Bond Carrying Value X 14% X 6/12	Discount Amortization	Unamortized Discount	Bonds Carrying Amount
	A	B	C = B-A	D = D - C	E = $65,000,000 - D
1-Feb-18	-	-	-	3,881,344	61,118,656
31-Jul-18	3,900,000	4,278,306	378,306	3,503,038	61,496,962
31-Jan-19	3,900,000	4,304,787	404,787	3,098,251	61,901,749
31-Jul-19	3,900,000	4,333,122	433,122	2,665,128	62,334,872
31-Jan-20	3,900,000	4,363,441	463,441	2,201,687	62,798,313
31-Jul-20	3,900,000	4,395,882	495,882	1,705,805	63,294,195
31-Jan-21	3,900,000	4,430,594	530,594	1,175,212	63,824,788
31-Jul-21	3,900,000	4,467,735	567,735	607,477	64,392,523
31-Jan-22	3,900,000	4,507,477	607,477	0	65,000,000
Answer 2-b.
Barnwell purchased Bonds (Face Value) = $65,000
Amount to be Paid by Barnwell for Bonds = $65,000 X $61,118,656 / $65,000,000 = $61,118.72 or say $61,119
Amount to be Paid by Barnwell for Bonds = $61,118.66 or say $61,119 (approx.)
Barnwell Industries
Bond Discount Amortization Schedule
Date	Interest Recd - $65,000 X 12%X6/12	Interest Expense - Preceeding Bond Carrying Value X 14% X 6/12	Discount Amortization	Unamortized Discount	Bonds Carrying Amount
	A	B	C = B-A	D = D - C	E = $65,000 - D
1-Feb-18	-	-	-	3,881	61,119
31-Jul-18	3,900	4,278	378	3,503	61,497
31-Jan-19	3,900	4,305	405	3,098	61,902
31-Jul-19	3,900	4,333	433	2,665	62,335
31-Jan-20	3,900	4,363	463	2,201	62,799
31-Jul-20	3,900	4,396	496	1,705	63,295
31-Jan-21	3,900	4,431	531	1,175	63,825
31-Jul-21	3,900	4,468	568	607	64,393
31-Jan-22	3,900	4,507	607	0	65,000

Answer 3 & 4.
Books of Cromley Motor Products
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
1-Feb-18	Cash	61,118,656
	Discount on Issue of Bonds	3,881,344
	Bonds Payable		65,000,000
	(record the issue of bonds)
31-Jul-18	Interest Expense	4,278,306
	Discount on issue of Bonds		378,306
	Cash		3,900,000
	(Record the interest paid)
31-Dec-18	Interest Expense	3,587,323		$4,304,787 X 5/6
	Discount on issue of Bonds		337,323	$404,787 X 5/6
	Interest Payable		3,250,000	$3,900,000 X 5/6
	(Record the interest Due)
31-Jan-19	Interest Expense	717,464		$4,304,787 X 1/6
	Interest Payable	3,250,000
	Discount on issue of Bonds		67,464	$404,787 X 1/6
	Cash		3,900,000
	(record the interest paid)
31-Jul-19	Interest Expense	4,333,122
	Discount on issue of Bonds		433,122
	Cash		3,900,000
	(Record the interest paid)
31-Dec-19	Interest Expense	3,636,201		$4,363,441 X 5/6
	Discount on issue of Bonds		386,201	$463,441 X 5/6
	Interest Payable		3,250,000	$3,900,000 X 5/6
	(Record the interest Due)
31-Jan-20	Interest Expense	727,240		$4,363,441 X 1/6
	Interest Payable	3,250,000
	Discount on issue of Bonds		77,240	$463,441 X 1/6
	Cash		3,900,000
	(record the interest paid)
Books of Barnwell Industries
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
1-Feb-18	Investment in Bonds	65,000
	Cash		61,119
	Discount on Bonds Investments		3,881
	(record the Bonds Purchased)
31-Jul-18	Cash	3,900
	Discount on Bonds Investment	378
	Interest Revenue		4,278
	(record the interest received)
31-Dec-18	Interest Receivable	3,250		$3,900 x 5/6
	Discount on Bonds Investment	337		$405 X 5/6
	Interest Revenue		3,587	$4305*5/6
	(record the interest receivable)
31-Jan-19	Cash	3,900
	Discount on Bonds Investment	68		$405 X 1/6
	Interest Revenue		718	$4,305 X 1/6
	Interest Receivable		3,250
	(Record the interest received)
31-Jul-19	Cash	3,900
	Discount on Bonds Investment	433
	Interest Revenue		4,333
	(record the interest received)
31-Dec-19	Interest Receivable	3,250		$3,900 X 5/6
	Discount on Bonds Investment	386		$463 X 5/6
	Interest Revenue		3,636	$4,363 X 5/6
	(record the interest receivable)
31-Jan-20	Cash	3,900
	Discount on Bonds Investment	77		$463 X 1/6
	Interest Revenue		727	$4,363 X 1/6
	Interest Receivable		3,250
	(Record the interest received)