On February 1, 2018, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $65 million. The bonds matu

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4 years ago

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On February 1, 2018, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $65 million. The bonds matu

re 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 $65,000 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.)
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.

Business

1 answer:

Likurg_2 [28] · Answer 1 · 2021-11-29T13:18:46+03:00

Answer:

1. Determine the price of the bonds issued on February 1, 2018.

the market value of each bond:

PV of face value = $1,000 / (1 + 4%)⁸ = $730.69
PV of coupon payments = $30 x 6.7327 (PV annuity factor, 4%, 8 periods) = $201.98

market price per bond = $932.67

2-a. I used an excel spreadsheet since there is not enough room here: Cromley Motors PDF

2-b. Again I used an excel spreadsheet since there is not enough room here:

3. February 1, 2018, bonds issued at a discount

Dr Cash 60,623,550

Dr Discount on bonds payable 4,376,450

Cr Bonds payable 65,000,000

4. Cromley's records:

July 31, 2018, first coupon payment

Dr Interest expense 2,424,942

Cr Cash 1,950,000

Cr Discount on bonds payable 474,942

January 31, 2019, second coupon payment

Dr Interest expense 2,443,940

Cr Cash 1,950,000

Cr Discount on bonds payable 493,940

July 31, 2019, third coupon payment

Dr Interest expense 2,463,697

Cr Cash 1,950,000

Cr Discount on bonds payable 513,697

January 31, 2020, fourth coupon payment

Dr Interest expense 2,484,245

Cr Cash 1,950,000

Cr Discount on bonds payable 534,245

Barnwell's records:

July 31, 2018, first coupon payment

Dr Cash 1,950

Dr Discount on bonds payable 2,425

Cr Interest revenue 475

January 31, 2019, second coupon payment

Dr Cash 1,950

Dr Discount on bonds payable 494

Cr Interest revenue 2,444

July 31, 2019, third coupon payment

Dr Cash 1,950

Dr Discount on bonds payable 514

Cr Interest revenue 2,464

January 31, 2020, fourth coupon payment

Dr Cash 1,950

Dr Discount on bonds payable 556

Cr Interest revenue 2,484

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