Question

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.)

Answer 1

Bond Price= C x [1-{1/(1+r)ⁿ}/r ] +M/(1+r)ⁿ

M= Face Value =$190,000,000

C= Coupon amount = Face Value x Coupon rate x time= $190,000,000 x 10% x 6/12=$9,500,000

r=rate of interest =12% or 0.12 i.e. 0.06

n= no of periods =15 years x 2=30

Bond Price = $9,500,000x [1-{1/ (1+0.06)³⁰}/0.06 ] +$190,000,000/ (1+0.06)³⁰

                    = $9,500,000x [1-{1/ (1.06)³⁰}/0.06 ] +$190,000,000/ (1.06)³⁰

                = $9,500,000x [1-{1/5.7434912}/0.06] +$190,000,000/5.7434912

                = $9,500,000x [1-{0.174110131}/0.06] + $ 33,080,924.87

                = $9,500,000x [0.825889869/0.06] + $ 33,080,924.87

                = $9,500,000x 13.76483115 + $ 33,080,924.87

             =$   130,765,895.94 + $ 33,080,924.87

             Issue price (Purchase price) =   $163,846,821

Discount received on Bond = Face value - Purchase price

                                                   =$190,000,000-$163,846,820.81

                                                   = $   26,153,179

Amortization of Discount received in 15 years i.e. 30 periods =$26,153.179/30=$871,773

Date	General Journal		Debit	Credit
Purchase of Bond
Jan 1 2018	Bonds Receivable		190,000,000
		Cash		163,846,821
		Discount on Bonds receivable		26,153,179
Receipt of first interest
June 30 2018	Cash		9,500,000
	Discount on Bonds receivable			871,773
		Interest revenue		10,371,773
receipt of first interest
Dec 31 2025	Cash		9,500,000
	Discount on Bonds receivable			871,773
		Interest revenue		10,371,773