On February 1, 2016, Cromley Motor Products issued 6% bonds, dated February 1, w
ID: 2416903 • Letter: O
Question
On February 1, 2016, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $50 million. The bonds mature on January 31, 2020 (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.
1- Determine the price of the bonds issued on February 1, 2016.
Price of Bonds: _____________
2- 1 Prepare amortization schedules that indicate Cromley’s effective interest expense for each interest period during the term to maturity.
2-2 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 Febuary 1, 2016.
4- Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2018.
Explanation / Answer
Answer 1. Cromley Cash interest Paid $1,500,000 (6% of $50 million x 6/12) A. Present Value of Interest @ 4% 10,099,050 (6.7327 X $1,500,000) B. PV of $50 Millions @ 4% 36,535,000 (0.7307 x $50 Millions) Total price of the Bonds (A+B) 46,634,050 Answer 2-1. Cromley's Effective Interest Expense Amortization Schedule Pmt. Cash Payment Effective Interest Discount Amortization Balance 0 46,634,050 1 1,500,000 1,865,362 365,362 46,999,412 2 1,500,000 1,879,976 379,976 47,379,388 3 1,500,000 1,895,176 395,176 47,774,564 4 1,500,000 1,910,983 410,983 48,185,547 5 1,500,000 1,927,422 427,422 48,612,968 6 1,500,000 1,944,519 444,519 49,057,487 7 1,500,000 1,962,299 462,299 49,519,787 8 1,500,000 1,980,791 480,213 50,000,000 Answer 2-2. Barnwell's Effective Interest Revenue Amortization Schedule Pmt. Cash Receipt Effective Interest Discount Amortization Balance 0 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 1,981 480 50,000 Barnewell's purchased = 50000 / 50000000 = 0.1% Price paid = 0.1% of 46634050 = $46634 Answer 3. Cromley Cash Dr. 46,634,050 Discount on bonds Payable Dr. 3,365,950 To Bonds Payable 50000000 Barnwell Investments in Bonds Dr. 50000 To Discount on Bonds Investment 3366 To Cash 46634 Answer 4. Cromley 7/31/16 Interest Exp Dr. 1,865,362 To Discount on B/p 365,362 To Cash 1,500,000 12/31/16 Interest Exp Dr. 1,566,647 To Discount on B/p 316,647 To Interest Payable 1,250,000 1/31/17 Interest payable Dr. 1,250,000 Interest Exp Dr. 313,329 To Discount on B/p 63,329 To Cash 1,500,000 7/31/17 Interest Exp Dr. 1,895,176 To Discount on B/p 395,176 To Interest Payable 1,500,000 12/31/17 Interest Exp Dr. 1,592,485 To Discount on B/p 342,485 To Interest Payable 1,250,000 1/31/18 Interest payable Dr. 1,250,000 Interest Exp Dr. 318,497 To Discount on B/p 68,497 To Cash 1,500,000 Barnwell 7/31/16 Cash Dr. 1,500 Disc. On Bond Invest. Dr. 365 To Interest Revenue 1,865 12/31/16 Interest receivable Dr. 1,250 Disc. On Bond Invest. Dr. 317 To Interest Revenue 1,567 1/31/17 Cash Dr. 1500 Disc. On Bond Invest. Dr. 63 To Interest Revenue 313 To Interest receivable 1,250 7/31/17 Cash Dr. 1,500 Disc. On Bond Invest. Dr. 395 To Interest Revenue 1,895 12/31/17 Interest receivable Dr. 1250 Disc. On Bond Invest. Dr. 342 To Interest Revenue 1,592 1/31/18 Cash Dr. 1500 Disc. On Bond Invest. Dr. 68 To Interest Revenue 318 To Interest receivable 1,250
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