Question

The Bradford Company issued 12% bonds, dated January 1, with a face amount of $87 million on January 1, 2018. The bonds mature on December 31, 2027 (10 years). For bonds of similar risk and maturity, the market yield is 14%. Interest is paid semiannually on June 30 and 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 at January 1, 2018.
2. to 4. Prepare the journal entry to record their issuance by The Bradford Company on January 1, 2018, interest on June 30, 2018 and interest on December 31, 2018 (at the effective rate).

termine the price of the bonds at January 1, 2018. (Enter your answers whole dollars.)

	Table values are based on: n = i = Cash Flow Amount Present Value Interest Principal Price of bonds

No	Date	General Journal	Debit	Credit
1	January 01, 2018
2	June 30, 2018
3	December 31, 2018

Answer 1

Solution 1:

Face value of bond = $87,000,000

Maturity period = 10 years, 20 semiannual periods

Coupon rate = 12%, 6% semiannual rate

Market rate of interest = 14%, 7% semiannual rate

Bond issue price = Present value of interest and principal discounted at market rate of interest=

($87,000,000 * 6%) * Cumulative PV factor at 7% for 20 periods + $87,000,000 * PV factor at 20th period for 7%

= $5,220,000 * 10.59401 + $87,000,000 * 0.258419

= $77,783,208

Solution 2:

Journal Entries - Bradford Company
S. No.	Date	Particulars	Debit	Credit
1	1-Jan-18	Cash A/c Dr	$77,783,208.00
		Discount on Bond A/c Dr	$9,216,792.00
		To Bond Payable A/c		$87,000,000.00
		(Being Bond issued at discount)
2	30-Jun-18	Interest Expense A/c Dr ($77,783,208*14%*6/12)	$5,444,825.00
		To Discount on Bond A/c		$224,825.00
		To Cash A/c ($87,000,000*12%*6/12)		$5,220,000.00
		(Being interest paid and discount on bond amortized)
3	31-Dec-18	Interest Expense A/c Dr [($77,783,208 + $224,825)*14%*6/12)	$5,460,562.00
		To Discount on Bond A/c		$240,562.00
		To Cash A/c		$5,220,000.00
		(Being interest paid and discount on bond amortized)