Question

On February 1, 2018, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $50 million. The bonds mature on January 31, 2022 (4 years). The market yield for bonds of similar risk and maturity was 8%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $50,000 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)

Required:
1. Determine the price of the bonds issued on February 1, 2018.
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, 2018.
4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2020.

Answer 1

Solution 1:

Computation of Bond Price
Table values are based on:
n=	8
i=	4%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.730690	$50,000,000	$36,534,510
Interest (Annuity)	6.732745	$1,500,000	$10,099,117
Price of bonds			$46,633,628

Solution 2a:

Bond Amortization schedule - Cromley Motors - Effective Interest Expense Method
Payment no	Cash payment	Effective interest	Discount Amortized	Outstanding balance
				$46,633,628
1	$1,500,000	$1,865,345	$365,345	$46,998,973
2	$1,500,000	$1,879,959	$379,959	$47,378,932
3	$1,500,000	$1,895,157	$395,157	$47,774,089
4	$1,500,000	$1,910,964	$410,964	$48,185,052
5	$1,500,000	$1,927,402	$427,402	$48,612,454
6	$1,500,000	$1,944,498	$444,498	$49,056,953
7	$1,500,000	$1,962,278	$462,278	$49,519,231
8	$1,500,000	$1,980,769	$480,769	$50,000,000

Solution 2b:

Bond Amortization schedule - Barnwell - Effective Interest Revenue Method
Payment no	Cash payment	Effective interest	Discount Amortized	Outstanding balance
				$46,634
1	$1,500	$1,865	$365	$46,999
2	$1,500	$1,880	$380	$47,379
3	$1,500	$1,895	$395	$47,775
4	$1,500	$1,911	$411	$48,185
5	$1,500	$1,927	$427	$48,613
6	$1,500	$1,945	$445	$49,057
7	$1,500	$1,962	$462	$49,520
8	$1,500	$1,981	$481	$50,001

Solution 3:

Journal Entries - Cromley
Date	Particulars	Debit	Credit
1-Feb-18	Cash Dr	$46,633,628
	Discount on bond payable Dr	$3,366,372
	To Bond Payable		$50,000,000
	(To record issue of bond at discount)

Journal Entries - Barnwell
Date	Particulars	Debit	Credit
1-Feb-18	Investment in Bond Dr	$50,000
	To Cash		$46,634
	To Discount on bond		$3,366
	(To record investment in bond)

Solution 4:

Journal Entries - Cromley
Date	Particulars	Debit	Credit
31-Jul-18	Interest Expense Dr	$1,865,345
	To Cash		$1,500,000
	To Discount on bond Payable		$365,345
	(To record semiannual interest payment and discount amortization)
31-Dec-18	Interest Expense Dr ($46,998,973*8%*5/12)	$1,566,632
	To Interest Payable ($50,000,000*6%*5/12)		$1,250,000
	To Discount on bond Payable		$316,632
	(To record interest accrued and discount amortized)
31-Jan-19	Interest Expense Dr ($46,998,973*8%*1/12)	$313,327
	Interest payable Dr	$1,250,000
	To Cash		$1,500,000
	To Discount on bond Payable		$63,327
	(To record semiannual interest payment and discount amortization)
31-Jul-19	Interest Expense Dr	$1,895,157
	To Cash		$1,500,000
	To Discount on bond Payable		$395,157
	(To record semiannual interest payment and discount amortization)
31-Dec-19	Interest Expense Dr ($47,774,089*8%*5/12)	$1,592,470
	To Interest Payable		$1,250,000
	To Discount on bond Payable		$342,470
	(To record interest accrued and discount amortized)
31-Jan-20	Interest Expense Dr ($47,774,089*8%*1/12)	$318,494
	Interest payable Dr	$1,250,000
	To Cash		$1,500,000
	To Discount on bond Payable		$68,494
	(To record semiannual interest payment and discount amortization)

Journal Entries - Barnwell
Date	Particulars	Debit	Credit
31-Jul-18	Cash Dr	$1,500
	Discount on bond Dr	$365
	To Interest revenue		$1,865
	(To record semiannual interest revenue and discount amortization)
31-Dec-18	Interest receivables Dr ($50,000*6%*5/12)	$1,250
	Discount on bond Dr	$317
	To Interest revenue ($46,999*8%*5/12)		$1,567
	(To record interest accrued and discount amortized)
31-Jan-19	Cash Dr	$1,500
	Discount on bond Dr	$63
	To Interest receivables		$1,250
	To Interest revenue ($46,999*8%*1/12)		$313
	(To record semiannual interest receipt and discount amortization)
31-Jul-19	Cash Dr	$1,500
	Discount on bond Dr	$395
	To Interest revenue		$1,895
	(To record semiannual interest revenue and discount amortization)
31-Dec-19	Interest receivables Dr	$1,250
	Discount on bond Dr	$342
	To Interest revenue ($47,775*8%*5/12)		$1,592
	(To record interest accrued and discount amortized)
31-Jan-20	Cash Dr	$1,500
	Discount on bond Dr	$69
	To Interest receivables		$1,250
	To Interest revenue ($47,775*8%*1/12)		$319.00
	(To record semiannual interest receipt and discount amortization)