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 $80 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 $80,000 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.)

Determine the price of the bonds issued on February 1, 2016. (Enter your answer in whole dollars.)

          

Prepare amortization schedules that indicate Cromley’s effective interest expense for each interest period during the term to maturity. (Enter your answers in whole dollars.)

          

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.)

          

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.)

Record the issuance of the bonds by Cromley.

Record the Bond investment by Barnwell.

Required: 1.

Determine the price of the bonds issued on February 1, 2016. (Enter your answer in whole dollars.)

Explanation / Answer

1)Price of the Bond as on Feb-1,2016 = 80*3%*PVIFA(4%,8) + 80*PVIF(4%,8)

= 2.4*6.7327 + 80*0.7307

= $74.6145 m

= 74.61448/0.08

= $932.68 per bond

..

2)

Amortization Schedule
$80.00 at 8% interest
with 8 semi-annual payments
Total Payments: $95.07 Total Interest: $15.07 Period
# Payment
Amount Principal
Part Interest
Part Balance
Owed 1 11.88 8.68 3.20 71.32 2 11.88 9.03 2.85 62.29 Period Payment Principal Interest Balance 3 11.88 9.39 2.49 52.90 4 11.88 9.76 2.12 43.14 Period Payment Principal Interest Balance 5 11.88 10.15 1.73 32.99 6 11.88 10.56 1.32 22.43 Period Payment Principal Interest Balance 7 11.88 10.98 0.90 11.45 8 11.91 11.45 0.46 0.00

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