Brew Brothers, Inc. issued the following debt on March 31, 2015 to finance a new

Question

Brew Brothers, Inc. issued the following debt on March 31, 2015 to finance a new bottling line: 1. A $500,000 five-year note, with a stated interest rate of zero percent. The effective rate on the bond is 4%. Interest on the note is compounded semiannually. 2. A ten-year bond with a stated rate of 5% and a face value of $10,000,000 was exchanged for a piece of land with a fair value of $9,256,375. Interest is paid semiannually on September 30 and March 31. 3. A four-year note with a stated rate of 4.5% and a face value of $10,000,000. Interest is paid annually on March 31. The effective interest rate is 4%. Required: a. Prepare the entry to record the issuance of each bond. b. Show what would be reported on the balance sheet at December 31,2015 related to the each issue. c. Show what would be reported on the statement of cash flow for the year ending December 31, 2015 related to the debt. Assume the direct method is used to report cash flows from operations. d. Show what would be reported on the 2016 income statement related to the debt.

Explanation / Answer

B Balance sheet as on 31.03.2015

Journal Entry Bank                                                                       Dr 410174         To 0% Bond application 410174 (being amount received) 0% Bond application                                        Dr 410174        To 0% Bond 410174 (being amount transferred) Land                                                                        Dr 9256375       To Vendor 9256375 (Being land purchased) Vendor                                                                   Dr 9256375 Discount on issue of Bond                             Dr 743625         To 5% Bond 10000000 (being bond issued) Bank                                                                       Dr 11250000       To 4.5% bond Application 11250000 (being 4.5% bond issued) 4.5% bond application                                    Dr 11250000      To 4.5% bond 10000000      To premium on issue of bond 1250000 (being amount transferred) Calculation of Issue price of 0% Bond Maturity Value 500000 Effective rate 4% Time 5 Yr Issue Price 500000 (1.02)10 410174.3 Calculation of Issue Price of 4.5% Bond Issue price = Interest/Rate of Return Issue price = 4.5 / 0.04 112.5 Issue price of Total Issue 11250000

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