Question

On February 1, 2021, Cromley Motor Products issued 8% bonds, dated February 1, with a face amount of $60 million. The bonds mature on January 31, 2025 (4 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $60,000 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

ANSWER:-

Since internet is semi annual, to calculate pv, interest rate will be 10%/2 = 5% & n= 4*2 = 8

Pv of principal ( pv of $1 @ 5% interest & n=8 is 0.6768) = $ 80 * 0.6768 = $ 54.144

pv of the annuity of semi-annual interest payments of 4.5 % of $ 80 million Cpv of annuity @ 5% interest & n=8 is 6.4632) = $3.6 million * 6.4632

= $ 23.2675 million

Cv of the bond = $ 54.144 + $ 23.2675 Discount on issue = $80 million - $ 77.4115 million = $ 2.5884 million

2) Amortisation schedule (effective interest Method)

Period	effective Interest @ 5%	Interest paid @ 4.5%	Plug for discount	Bond carrying value
0				$ 77.4115
1	3.8705	3.6	0.2705	$ 77.682
2	3.8841	3.6	0.2841	$ 77.9661
3	3.8983	3.6	0.2983	$78.2644
4	3.91322	3.6	0.3132	$78.57765
5	3.9289	3.6	0.3289	$78.906
6	3.9453	3.6	0.3453	$79.2518
7	3.9626	3.6	0.3626	$79.6144
8	3.9856	3.6	0.3856	$ 8.0

3)

	Issuer Journal entries	Investor Journal entries
(1) Issue	Cash $77.4115 million Bonds discount $ 2.5884 million Bond Payable $80 million	Bond Investment $77.4115 Cash $ 77.4115

4)

Dec-2021	Interest exp $ 3.6 million Cash $3.6 million	Cash $3.6 million Interest Income $ 3.6 million
	Interest exp $0.2705 million Bond discount $ 0.2705 million	Bond investment $ 0.2705 million Interest Income $ 0.2705
Dec-2022	Interest exp $ 3.6 million Cash $ 3.6 million	Cash $ 3.6 million Interest Income $ 3.6 million
	Interest exp $ 0.2841 million Bond discount $ 0.2841 million	Bond investment $ 0.2841 million Interest Income $0.2841
Dec - 2023	Interest exp $ 3.6 million Cash $ 3.6 million	Cash $3.6 million Interest Income $ 0.3.6 million
	Interest exp $ 0.2983 million Bond discount $ 0.2983 million	Interest exp $ o.2983 million Bond discount $ 0.2983

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