Question

Universal Foods issued 10% bonds, dated January 1, with a face amount of $140 million on January 1, 2018. The bonds mature on December 31, 2037 (20 years). The market rate of interest for similar issues was 12%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. (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 Universal Foods on January 1, 2018, interest on June 30, 2018 and interest on December 31, 2025.

Answer 1

Answer 1

Face Value of the bond	14,00,00,000
Semi Annual Interest Rate	5%
Semi Annual Interest ($)	7000000
PVIFA @ 6% for 40 semi annual years (A)	15.04630
PV of Interest payments	10,53,24,078
Maturity value of the bond	140000000
PVIF @ 6% for 40th semi annual Year	0.097222188
PV of Maturity Value (B)	1,36,11,106
Issue Value of the bond (A) + (B)	11,89,35,184
Discount on Issue of Bond (Face Value - Issue Value)	2,10,64,816
Semi Annual Amortisation of discount for 40 semi annual years)	5,26,620

Answer 2 to 4

	Journal Entries
Date	Accounts & Explanation	Debit	Credit
01-01-2018	Cash	11,89,35,184
	Discount on Bonds Payable	2,10,64,816
	10% Bonds Payable		14,00,00,000
	(Recording issue of 10% bond at a discount)
30-06-2018	Interest Expense	75,26,620
	Discount on Bonds Payable		5,26,620
	Cash		70,00,000
	(Being interest paid for semi annual year ended on 30.06.2018 & discount of bonds payable amortised based on SLM)
31-12-2025	Interest Expense	75,26,620
	Discount on Bonds Payable		5,26,620
	Cash		70,00,000
	(Being interest paid for semi annual year ended on 31.12.2025 & discount of bonds payable amortised based on SLM)