Question

On January 1, 2021, Cool Universe issued 10% bonds dated January 1, 2021, with a face amount of $20 million. The bonds mature in 2030 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. The company's fiscal year is the calendar year. (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, 2021.
2. Prepare the journal entry to record the bond issuance by Cool on January 1, 2021.
3. Prepare the journal entry to record interest on June 30, 2021, using the straight-line method. [Assume interest is not accrued monthly.]
4. Prepare the journal entry to record interest on December 31, 2021, using the straight-line method. [Assume interest is not accrued monthly.]

Answer 1

1. As Interest is payable semiannually therefore no. of periods would be 10 years * 2 = 20 periods & discounting rate would be 12% / 2 = 6% per period so,
Price of Bonds = Present value of the all future cash flows
= $10,00,000 * 11.4699 + $2,00,00,000 * 0.3118 = $1,77,05,900

Sr. No.	Date	Particulars	Debit	Credit
2.	01-01-21	Bank A/c Dr.	$        17,705,900
		Discount on Bond Purchase A/c Dr.	$          2,294,100
		To 10% Bonds Payable A/c		$        20,000,000
		(Being bonds issued)
3.	30-06-21	Interest Expenses A/c Dr.	$          1,114,705
		To Bank A/c		$          1,000,000
		To Discount on Bond Purchase A/c		$              114,705
		(Being interest on bond recorded & paid)
4.	31-12-21	Interest Expenses A/c Dr.	$          1,114,705
		To Bank A/c		$          1,000,000
		To Discount on Bond Purchase A/c		$              114,705
		(Being interest on bond recorded & paid)