Question

THIS IS A TWO PART QUESTION: PART 1: On January 1, 2017, Mania Enterprises issued 10% bonds dated January 1, 2017, with a face amount of $25 million. The bonds mature in 2026 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. You may round all amounts to the nearest $1 if necessary. Mania Enterprises - Issuer: 1. Determine the price of the bonds at January 1, 2017. Show your calculation. 2. Prepare the journal entry to record the bond issuance by Mania on January 1, 2017. 3. Prepare the journal entry to record interest on June 30, 2017, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2017, using the effective interest method. 5. Prepare the journal entry to record the maturity of the bonds in 2026 (assume that the final interest payment has already been recorded). Use a Partial Amortization Schedule for Mania Bonds (Issuer). PART 2: Tempest Company purchased 50% of the Mania bonds described in Part #1 as an investment on January 1, 2017 when they were issued. Tempest has the inent and ability to hold the bond investment until maturity. You may round all amounts to the nearest $1 if necessary. Tempest Company - Investor: 1. Determine the price Tempest paid for its purchase of 50% of the Mania bonds on January 1, 2017. 2. Prepare the journal entry to record the bond purchase by Tempest on January 1, 2017. 3. Prepare the journal entry to record interest on June 30, 2017, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2017, using the effective interest method. 5. Prepare the journal entry to record the maturity of the bonds in 2026 (assume that the final interest payment has already been recorded). Use a Partial Amortization Schedule for Tempest's Investment in 50% of Mania Bonds (Investor).

Answer 1

	1	CALCULATION OF BOND PRICE
		Bond Price=Present Value of future cash flows
		Future cash flows:
	A	Face amount	$25,000,000
	B=(0.1*A)/2	Semi-annual coupon	$          1,250,000
		Number of semiannual periods of coupon payment	20	(10*2)
		Required semi-annual yield	6%	(12/2)
		Terminal payment of maturity amount	$25,000,000
		Present Value of cash flows	$22,132,520	(Using PV function of excel with Rate=6%, Nper=20,Pmt=-1250000,FV=-25000000 )
		Price of bonds at January 1, 2017	$22,132,520
	2
	JOURNAL ENTRY
	Date	Account Title	Debit	Credit
	.January 1, 2017	Cash	$22,132,520
		Discount on bonds payable	$2,867,480		(25000000-22132520)
		Bonds payable		$25,000,000
		(To record issuance of 10% semiannual Bond at discount)
	3
	Date	Account Title	Debit	Credit
	.June 30,2017	Interest expense	$1,393,374		(1250000+143374)
		Discount on bonds payable		$143,374	(2867480/20)=		$143,374
		Cash		$ 1,250,000	(25000000*0.1)/2
		(To record interest expense on bonds payable
	4
	Date	Account Title	Debit	Credit
	,December 31,2017	Interest expense	$1,393,374
		Discount on bonds payable		$143,374
		Cash		$ 1,250,000
		(To record interest expense on bonds payable
	5
	Date	Account Title	Debit	Credit
	,December 31,2026	Bonds payable	$25,000,000
		Cash		$25,000,000
		(To record payment of bond at maturity)