Question

Universal Foods issued 14% bonds, dated January 1, with a face amount of $145 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 16%. 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

1. Entry at the time of Purchase of Bonds on January 1, 2018 by Wang Communications:

- Bonds Receivable A/c Dr. $145 million

To Discount Received on Bonds A/c Cr. $16.32 million

To Cash/Bank A/c Cr. $128.68 million

{Here, bonds are issued at 14% coupon rate, which is lesser than market interest rate of 16%. Thus, bonds are said to be issued on discount. Thus, at the time of purchase i.e. 1st of january 2018, purchaser will pay amount lesser than the face amount receivable at the time of redemption of bonds. - [Purchase Value of Bonds = Present Value of Annuity of Semi Annual Interest Payments + Present Value of One time Face Amount of Bonds Receivable at the end of maturity period; here market interest rate 16% to be taken to find out present value]

- Semi Annual Interest payments = $145 million x (14%/2) = $10.15

- Present value of annuity of interest payments for 30 periods (15 years semiannually) = $10.15 million x PVOA Factor (rate16%/2, period 30) = $10.15 million x 11.26 = $ 114.27 million

- Present value of one time face amount = $ 145 x PV factor of 15 years, 16% rate of interest = $145 million x 0.0994 = $ 14.41 million

- Purchase Value of Bonds = Present Value of Annuity of Semi Annual Interest Payments + Present Value of One time Face Amount of Bonds Receivable at the end of maturity period; here market interest rate 16% to be taken to find out present value = $ $ 114.27 million + $ 14.41 million = $ 128.68 million}

2. Entry at the time of Interest Revenue Received on June 30, 2018 by Wang Communications:

- Cash/Bank A/c Dr. $10.15 million

To Interest on Bonds Income A/c Cr. $10.15 million

3. Entry at the time of Interest Revenue Received on December 31, 2025 by Wang Communication:

- Cash/Bank A/c Dr. $10.15 million

To Interest on Bonds Income A/c Cr. $10.15 million

* interest payment amount will remain same for the whole period of the bonds, as it is to be paid by straight line method.

interest = $145 million x 14% x 1/2 = $10.15