Question

On February 1, 2021, Cromley Motor Products issued 12% bonds, dated February 1, with a face amount of $65 million. The bonds mature on January 31, 2025 (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, 2021.
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, 2021.
4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2023.

Answer 1

1-
price of bond	(coupon payment*PVAF at 7% for 8 semiannual period)+(face value*PVF at 7% at 8th semiannual period)	(3900000*5.9713+(65000000*0.582009))	61118655
coupon payment	65000000*7%		3900000
Face value			65000000
PVAF at 7% for 8 semiannual	1-(1+r)^-n / r   rv=7% n = 8	1-(1.07)^-8 / 7%	.417990/7%	5.971286
PVF at 7% at 8th semiannual period	1/(1+r)^n	1/(1.07)^8		0.582009
2-A
Amortization schdeule - effective interest method
Period	cash paid - face value*coupon rate*1/2   coupon rate =125	Interest expense = carrying value of bonds*market rate of interest*1/2     market rate of interest	Discount amortized = Interest expense-cash paid as Interest	balance in discount to be amortized	carrying vaue of bond = beginning balance-discount to be amortized	Face value
0				3881345	61118655	65000000
1	3900000	4278305.85	378305.9	3503039	61496960.9	65000000
2	3900000	4304787.26	404787.3	3098252	61901748.1	65000000
3	3900000	4333122.368	433122.4	2665130	62334870.5	65000000
4	3900000	4363440.933	463440.9	2201689	62798311.4	65000000
5	3900000	4395881.799	495881.8	1705807	63294193.2	65000000
6	3900000	4430593.525	530593.5	1175213	63824786.7	65000000
7	3900000	4467735.071	567735.1	607478.2	64392521.8	65000000
8	3900000	4507476.526	607478.2	0	65000000	65000000
2-B
Amortization schdeule - effective interest method - Investment held as maturity
Period	Interest revenue received = face value*coupon rate*1/2	Interest revenue = carrying value*market interest rate*1/2	Discount amortized	Investment in bonds	Face value
0				61118.66	65000
1	3900	4278.30585	378.3059	61496.96	65000
2	3900	4304.78726	404.7873	61901.75	65000
3	3900	4333.122368	433.1224	62334.87	65000
4	3900	4363.440933	463.4409	62798.31	65000
5	3900	4395.881799	495.8818	63294.19	65000
6	3900	4430.593525	530.5935	63824.79	65000
7	3900	4467.735071	567.7351	64392.52	65000
8	3900	4507.476526	607.4765	65000	65000
3-
date	explanation	debit	credit
1-Feb	cash	61118655
	discount on bonds payable	3881345
	bonds payable		65000000
	(bonds issued at discount)
4-
date	explanation	debit	credit
1-Feb	investment in bonds	61118.655
	cash		61118.66
31-Jul	cash	3900
	investment in bonds	378.30585
	Interest revenue		4278.306
31-Dec	Interest receivable	3250
	investment in bonds	337.3227163
	Interest revenue		3587.323
2022
31-Jan	cash	3900
	investment in bonds	67.46454325
	Interest receivable		3250
	Interest revenue		717.4645
31-Jul	cash	3900
	investment in bonds	433.1223677
	Interest revenue		4333.122
31-Dec	Interest receivable	3250
	investment in bonds	386.2007778
	Interest revenue		3636.201
2023
31-Jan	cash	3900
	investment in bonds	77.24015557
	Interest receivable		3250
	Interest revenue		727.2402