On February 1, 2016, Cromley Motor Products issued 6% bonds, dated February 1, w

Question

On February 1, 2016, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $55 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 $55,000 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.

3.  
Prepare the journal entries to record the issuance of the bonds by Cromley and Barnwell’s investment on February 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

1)

Determine the price of the bonds issued on February 1, 2016.

Cromley: Cash interest paid: 6% x $55,000,000 x 6/12 = $1650000

Present value of interest:

Table 4, 8 payments @ 4% = 6.73274 x $1650000 = $11109021

Present value of $55 million:

Table 2, 8 periods @ 4% = 0.73069 x $55,000,000 = $40187950

Price of bonds: $51296971 ($11109021+ $40187950)

Barnwell purchased 55000 ÷ 55,000,000 = 0.1% of the bonds.

Therefore, the price paid was 0.1% x $51296971= $51297

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