Question

The Bradford Company issued 12% bonds, dated January 1, with a face amount of $83 million on January 1, 2016. The bonds mature on December 31, 2025 (10 years). For bonds of similar risk and maturity, the market yield is 14%. Interest is paid semiannually on June 30 and 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 at January 1, 2016. (Enter your answers whole dollars.) 2. to 4. Prepare the journal entry to record their issuance by The Bradford Company on January 1, 2016, interest on June 30, 2016 and interest on December 31, 2016 (at the effective rate). (Enter your answers in whole dollars. If no journal entry is required for a transaction, select "No journal entry required" in the first account field.)Required:1. Determine the price of the bonds at January 1, 20162. to 4. Prepare the journal entry to record their issuance by The Bradford Company on January 1, 2016, interest on June 30, 2016 and interest on December 31, 2016 (at the effective rate).

Answer 1

Answer:

Dr   Cash                                                             $74,210,000

Dr discount on bonds payable($83-$74.21)      $8,790,000

Cr Bonds payable                                                                    $83,000,000

30 June 2016

Dr Interest expense  $5,194,700.00  

Cr discount on bonds payable                $214,700.00  

Cr Cash                                                      $4,980,000  

31 December 2016

Dr interest expense   $5,209,729.00  

Cr discount on bonds payable          $229,729.00  

Cr cash                                                 $4,980,000

find detailed computations in the attached.

Explanation:

The price of the bond can determined using the pv formula in excel as shown below:

=-pv(rate,nper,pmt,fv)

rate is the semiannual yield to maturity on the bond i.e 14%/2=7%

nper is the number of coupon interests the bond would pay which is 10 years *2 =20 coupon interests

pmt is the semiannual interest payment:$83,000,000*12%*6/12=$4,980,000.00=$4.98 million

fv is the face value of $83 million

=-pv(7%,20,4.98,83)=$74.21  million

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