On February 1, 2016, Cromley Motor Products issued 12% bonds, dated February 1,
ID: 2418459 • Letter: O
Question
On February 1, 2016, Cromley Motor Products issued 12% bonds, dated February 1, with a face amount of $60 million. The bonds mature on January 31, 2020 (4 years). The market yield for bonds of similar risk and maturity was 14%. 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. 1. Determine the price of the bonds issued on February 1, 2016. 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. (Enter your answers in whole dollars.) 3. Prepare the journal entries to record the issuance of the bonds by Cromley and Barnwell’s investment on February 1, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) 4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)
Explanation / Answer
1. Price of the Bond issued on February 1, 2016:
Coupon Payment per period = 60 x 6% = $3.6 million
Total Coupon = 8
Present Value of annuity of $3,600,000 at 7%
PV = Payment / i [1 - 1 / (1+i)^n]
PV = 3,600,000 / 0.07 [ 1 - 1/ (1+0.07)^8] = $21,496,674.62
PV of matuiry value = 60,000,000 / (1+0.07)^8 = $34,920,546.27
Total = 21,496,674.62 + 34,920,546.27= $56,417,221
Issue Price of the bond = $56,417,221
2. Bond discount amortization schedule:
Date Interest Payment Interest Expenses Amortization Debit balance in dis. account Book value of bonds 3,582,779 56,417,221 July 31 2016 3,600,000 3,949,205 349,205 3,233,574 56,766,426 Jan 31, 2017 3,600,000 3,973,650 373,650 2,859,924 57,140,076 July 31 2017 3,600,000 3,999,805 399,805 2,460,119 57,539,881 Jan 31 2018 3,600,000 4,027,792 427,792 2,032,327 57,967,673 July 31 2018 3,600,000 4,057,737 457,737 1,574,590 58,425,410 Jan 31 2019 3,600,000 4,089,779 489,779 1,084,811 58,915,189 July 31 2019 3,600,000 4,124,063 524,063 560,748 59,439,252 Jan 31 2020 3,600,000 4,160,748 560,748 0 60,000,000Related Questions
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