Problems Connect On January 1 , 2018, Instaform, Inc., issued 10% bonds with a f

Question

Problems Connect On January 1 , 2018, Instaform, Inc., issued 10% bonds with a face amount of S50 million, dated January 1, The 14-1 eemning the bonds mature in 2037 (20 years). The market yield for bonds of similar risk and maturity is 12%. Interest is paid rice of bonds; semiannually scount and ssuer Required: 1. Determine the price of the bonds at January 1, 2018, and prepare the journal entry to record their issuance by 2, Assume the market rate was 9%. Determine the price of the bonds at January 1, 2018, and prepare the Journal 3. Assume Broadcourt Electronies purchased the entire issue in a private placement of the bonds. Using the data nd investor L014-2 Instaform. entry to record their issuance by Instaform. in requirement 2, prepare the journal entry to record the purchase by Broadcourt.

Explanation / Answer

1 Value of bond: Present value of semi-annual interest payment plus Present value of bond repayment Present value of semi-annual interest payment: Semi-annual interest payment=$50 mn*10%*1/2=1250000 Present value of semi-annual interest payment=2500000*(Discount factor at 6% for 40 semi-annual payments)=1250000*15.0463=18807875 Present value of bond repayment=50 Mn*(Discount factor @ 6% for 40th semi-annual period)=50000000*0.0972=4860000 Value of bond=18807875+4860000=23667875 Entry: Account titles Debit Credit Cash 23667875 Discount on issue of bonds 1332125 Bond payable 25000000 2 Value of bond: Present value of semi-annual interest payment plus Present value of bond repayment Present value of semi-annual interest payment: Semi-annual interest payment=$50 mn*10%*1/2=1250000 Present value of semi-annual interest payment=2500000*(Discount factor at 4.5% for 40 semi-annual payments)=1250000*18.4016=23002000 Present value of bond repayment=50 Mn*(Discount factor @ 4.5% for 40th semi-annual period)=50000000*0.1719=8595000 Value of bond=23002000+8595000=31597000 Entry: Account titles Debit Credit Cash 31597000 Premium on issue of bonds 6597000 Bond payable 25000000 3 Account titles Debit Credit Investment in long-term debt securities 25000000 Bond premium 6597000 Cash 31597000 (Purchase of bonds)

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