On January 1, 2018, Instaform, Inc., issued 12% bonds with a face amount of $65

Question

On January 1, 2018, Instaform, Inc., issued 12% bonds with a face amount of $65 million, dated January. The bonds mature in 2037 (20 years). The market yield for bonds of similar risk and maturity is 14%. Interest is paid semiannually. (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.) Required: 1-a. Determine the price of the bonds at January 1, 2018. 1-b. Prepare the journal entry to record their issuance by Instaform. 2-a. Assume the market rate was 11%. Determine the price of the bonds at January 1, 2018. 2-b. Assume the market rate was 11%. Prepare the journal entry to record their issuance by Instaform. 3. Assume Broadcourt Electronics purchased the entire issue in a private placement of the bonds. Using the data in requirement 2, prepare the journal entry to record the purchase by Broadcourt. Complete this question by entering your answers in the tabs below. Req 1A Determine the price of the bonds at January 1, 2018. (Enter your answer in whole dollars.) rice of the bonds 57,334,369 Req 1B Req 2A Req 2B Req 3 Req 1A Req 1B

Explanation / Answer

Solution 1a:

Issue price of bond = Present value of interest and principal discounted at market rate of interest

Coupon rate = 12%, 6% semi annual

Market rate = 14%, 7% semi annual

= ($65,000,000 * 6%) * Cumulative PV factor at 7% for 40 periods + $65,000,000 * PV factor at 7% for 40th period

= $56,334,389

Discount on issue of bond = $65,000,000 - $56,334,389 = $8,665,611

Solution 1b:

Solution 2a:

Issue price of bond = Present value of interest and principal discounted at market rate of interest

Coupon rate = 12%, 6% semi annual

Market rate = 11%, 5.50% semi annual

= ($65,000,000 * 6%) * Cumulative PV factor at 5.50% for 40 periods + $65,000,000 * PV factor at 5.50% for 40th period

= $70,214,991

Solution 2b:

Solution 3:

Journal Entries Event Particulars Debit Credit 1 Cash Dr $56,334,389.00 Discount on bond payable Dr $8,665,611.00       To Bond Payable $65,000,000.00 (To record issue of bond)

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