In: Accounting
Universal Foods issued 10% bonds, dated January 1, with a face
amount of $190 million on January 1, 2018 to Wang Communications.
The bonds mature on December 31, 2032 (15 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. Universal Foods sold the entire bond issue to
Wang Communications. (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:
1-3. Prepare the journal entry to record the
purchase of the bonds by Wang Communications on January 1, 2018,
interest revenue on June 30, 2018 and interest revenue on December
31, 2025. (Enter your answers in whole dollars. If no entry
is required for a transaction/event, select "No journal entry
required" in the first account field.)
Valuation of bond price = coupon * PVIFA(Yield% , n) + face value * PVIF(Yield% , n)
When interest is paid semi-annual, the interest rates are half and period gets double.
Valuation of bond price = (190m*5%) * PVIFA(6% ,30) + 190m * PVIF(6% ,30) = 9.5m*13.7648 + 190m*0.1741 = $163.8446m
discount value = 190m - 163.8446m = $26.1554m
Straight line amortisation of discount = 26.1554/30 = $0.87185m
Journal Entries in Wang Communications books:
Date | Accounts Titles | Debit $ | Credit $ |
Jan 1 2018 | Bond Receivable | 190m | |
Discount on Bond Receivable | 26.1554m | ||
Cash | 163.8446m | ||
(purchase of bonds at discount) | |||
June 30 2018 | Cash (190m*5%) | 13.7648m | |
Discount on Bond issued | 0.87185m | ||
Interest Revenue | 14.63665m | ||
(interest revenue received for first 6 months) |
Dec 31 2025 | Interest expense | 14.63665m | |
Cash (190m*5%) | 13.7648m | ||
Discount on Bond issued | 0.87185m | ||
(interest revenue of sixteenth interest) |