Question

On February 1, 2021, Cromley Motor Products issued 7% 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 8%. 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.)

Determine the price of the bonds issued on February 1, 2021. (Do not round intermediate calculations. Enter your answer in whole dollars.

	Price of the bonds

2.prepare amortization schedules that indicate Cromley’s effective interest expense for each interest period during the term to maturity. (Do not round intermediate calculations. Enter your answers in whole dollars.

	Payment Number Cash Payment Effective Interest Increase in Balance Outstanding Balance 1 2 3 4 5 6 7 8 Totals $0 $

3. Prepare amortization schedules that indicate Barnwell’s effective interest revenue for each interest period during the term to maturity. (Do not round intermediate calculations. Enter your answers in whole dollars.

	Payment Number Cash Payment Effective Interest Increase in Balance Outstanding Balance 1 2 3 4 5 6 7 8 Totals $0 $0 $0

4. Prepare the journal entries to record the issuance of the bonds by Cromley and Barnwell’s investment on February 1, 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in whole dollars.)

No	Date	General Journal	Debit	Credit
1	February 01, 2021	Cash
		Discount on bonds payable
		Bonds payable
2	February 01, 2021	Investment in bonds
		Discount on bond investment
		Cash

Answer 1

Requirement 1:

Cash interest = $60,000,000 x 7% x (6/12) = $2,100,000

Present value of interest payments	$14,138,764
[$2,100,000 x 6.7327449 present value annuity factor (4%, 8 years)]
Present value of face value	$43,841,412
[$60,000,0000 x 0.7306902 present value factor (4%, 8 years)]
Price of the bonds	$57,980,176

Requirement 2:

Cromley’s

Amortization Schedule
Payment Number	Cash payment	Effective Interest	Increase in Balance	Outstanding Balance
				$57,980,176
1	$2,100,000	$2,319,207	$219,207	$58,199,383
2	$2,100,000	$2,327,975	$227,975	$58,427,358
3	$2,100,000	$2,337,094	$237,094	$58,664,453
4	$2,100,000	$2,346,578	$246,578	$58,911,031
5	$2,100,000	$2,356,441	$256,441	$59,167,472
6	$2,100,000	$2,366,699	$266,699	$59,434,171
7	$2,100,000	$2,377,367	$277,367	$59,711,538
8	$2,100,000	$2,388,462	$288,462	$60,000,000
Total	$16,800,000	$18,819,823	$2,019,824

Effective interest = Previous outstanding balance x 4% [Semi-annual interest rate of 8%]

Increase in balance = Effective interest - Cash payment

Outstanding balance = Previous Outstanding balance + Increase in balance

Requirement 3:

Barnwell’s

Amortization Schedule
Payment Number	Cash payment	Effective Interest	Increase in Balance	Outstanding Balance
				$57,980
1	$2,100	$2,319	$219	$58,199
2	$2,100	$2,328	$228	$58,427
3	$2,100	$2,337	$237	$58,664
4	$2,100	$2,347	$247	$58,911
5	$2,100	$2,356	$256	$59,167
6	$2,100	$2,367	$267	$59,434
7	$2,100	$2,377	$277	$59,711
8	$2,100	$2,388	$288	$60,000
Total	$16,800	$18,820	$2,020

Effective interest = Previous outstanding balance x 4% [Semi-annual interest rate of 8%]

Increase in balance = Effective interest - Cash payment

Outstanding balance = Previous Outstanding balance + Increase in balance

Requirement 4:

Cromley’s

Date	General Journal	Debit	Credit
Feb 1,2021	Cash	$57,980,176
	Discount on bonds payable	$2,019,824
	Bonds payable		$60,000,000
	[To record issuance of bonds]

Barnwell’s

Date	General Journal	Debit	Credit
Feb 1,2021	Investment in bonds	$60,000
	Discount on bonds investment		$2,020
	Cash		$57,980
	[To record investment in bonds]