Question

Universal Foods issued 10% bonds, dated January 1, with a face amount of $150 million on January 1, 2018 to Wang Communications. The bonds mature on December 31, 2032 (15 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. Universal Foods sold the entire bond issue to Wang Communications. (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: 1-3. Prepare the journal entry to record the purchase of the bonds by Wang Communications on January 1, 2018, interest revenue on June 30, 2018 and interest revenue on December 31, 2025. (Round final answers to the nearest whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

semiannual interest = Face value *stated interest rate * n/12

                      = 150,000,000 * .10*6/12

                       = 7,500,000

semiannual months = 15*2 = 30                                   [2semiannual periods in a year]

Semiannual market rate = 12*6/12 = 6%

Price of Bond =[PVA6%,30*Semiannual interest ]+[PVF6%,30*Face value]

                 =[13.76483*7500000]+ [.17411*150000000]

                 = 103,236,225+ 26,116,500

                 = 129,352,725

Discount on Bond = 150,000,000- 129,352,725 = 20,647,275

semiannual amortization of bond (using straight line method )= Discount on bond /number of semiannual months

                         = 20647275/ 30

                           = 688,242.50   (rounded to 688,243)

Date	Account title	Debit	credit
Jan 1, 2018	Investment in bond	129,352,725
	cash		129,352,725
30 June 2018	cash	7,500,000
	Investment in bond	688,243
	Interest revenue		8,188,243
31 December 2025	cash	7,500,000
	Investment in bond	688,243
	Interest revenue		8,188,243