Question

Problem 14-1 (Algo) Determining the price of bonds; discount and premium; issuer and investor [LO14-2]

On January 1, 2021, Instaform, Inc., issued 10% bonds with a face amount of $48 million, dated January 1. The bonds mature in 2040 (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, 2021.
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, 2021.
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.

Answer 1

1.a.Determinatio of price of Bond_ assuming face value of each bond is 48

Market yeild = 12%

Price of Bond=

Interest amount for due* PVAF of 12% for 20 years+

Resumtion value*PVF of 12% at 20th year

=(48*10%)*7.4694+ 48*0.10366

=40.83

Note:

PVF( Present value of factor) of 12%, 20 years is calculated as follows

=1.12÷= 20 times i.e in calculator press 1.12 and press divide symbol and press equal symbol for 20 times

=0.103666

##PVAF( present value of annuity factor) of 12%, 20th year is calculated as follows

= 1.12 ÷ {=M+}20times i.e. in calculate press 1.12 and press divide symbol and press equal and M+ for 20times and finally Mrc

=7.4694

1.b journal entry

Particulars	Debit $ in Millions	Credit $ in Millions
Cash/bank a/c. Dr	40.829
Discount on issue of bonds. Dr	7.171
To 10% bonds		48.00
( Being, Bonds issued on discount)

2.a. Determination of value of bond

If market yeild is 9%

Price of Bond=

Interest amount for due* PVAF of 9% for 20 years+

Resumtion value*PVF of 9% at 20th year

=(48*10%)*9.1285+ 48*0.1784

=52.38

Note:

PVF( Present value of factor) of 9%, 20 years is calculated as follows

=1.09÷= 20 times i.e in calculator press 1.09 and press divide symbol and press equal symbol for 20 times

=0.1784

##PVAF( present value of annuity factor) of 9%, 20th year is calculated as follows

= 1.09÷ {=M+}20times i.e. in calculate press 1.09 and press divide symbol and press equal and M+ for 20times and finally Mrc

=9.1285

2.b.journal entry

Particulars	Debit $ in Millions	Credit $ in Millions
Cash/bank a/c. Dr	52.88
To 10% bonds		48.00
To Premium on issue of bond		12.88
( Being, Bonds issued at premium)

3. Journal entry in the books of broad court electronic on purchase of bonds

Particulars	Debit $ Millions	Credit $ Millions
10% Bonds_ Investment a/c	52.38
To bank a/c		52.38
( Being , investment made in 10% bonds of instaform Inc)