The Bradford Company issued 10% bonds, dated January 1, with a face amount of $8

Question

The Bradford Company issued 10% bonds, dated January 1, with a face amount of $80 million on January 1, 2013. The bonds mature on December 31, 2022 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required:

    1. Determine the price of the bonds at January 1, 2013.
    2. Prepare the journal entry to record their issuance by The Bradford Company on January 1, 2013.
    3. Prepare the journal entry to record interest on June 30, 2013 (at the effective rate).
    4. Prepare the journal entry to record interest on December 31, 2013 (at the effective rate).

Explanation / Answer

Bond price=C*[1-[1/(1+i)n]]/i+M/(1+i)n=

C= Bond Interest amount= 10% and semi annual is 5% so amount is $4000000

i= market yield rate is 12% and semi annual will be 6%

M= Face value of bond

=4000000*[1-[1/(1+.06)20]]/.06+80000000/(1+.06)20

=4000000*(1-.3118)/.06+80000000/3.207=

=

=$70825432

the difference=80000000-70825432= 9174568

Amortized on SLM=9174568/20=$458728round off

This means bond are sold on discounts to attract the investors.

1. The price of the bond is the face amount of $80 million

USD$ million

2. 1 jan 2013 Cash a/c Dr 70825432

Discount on bond payable 458728

10% Bond Payable 80000000   

(Being cash received from the issuance of 10% bond)

3) 30 June 2013 Interest Expenses a/c Dr 458728

Dicount on Bond payable 58728

Interest Payable 4000000

31st Jan 2013 Interest Expenses a/c Dr 458728

Dicount on Bond payable 58728

Interest Payable 4000000   

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