On February 1, 2016, Cromley Motor Products issued 12% bonds, dated February 1,
ID: 2460796 • Letter: O
Question
On February 1, 2016, Cromley Motor Products issued 12% bonds, dated February 1, with a face amount of $65 million. The bonds mature on January 31, 2020 (4 years). The market yield for bonds of similar risk and maturity was 14%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $65,000 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.
Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2018. (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 interest expense of Cromley company.
Record the interest expense of Cromley company.
Record the interest expense of Cromley company.
Record the interest expense of Cromley company.
Record the interest expense of Cromley company.
Record the interest expense of Cromley company.
Required: 1.Determine the price of the bonds issued on February 1, 2016. (Enter your answer in whole dollars.)
Explanation / Answer
Answer 1. Calculation of Price of the Bonds issued on Feb 1, 2016 Amount PV of $65,000,000 due in 8 periods at 7% ($524800 X 0.5820) 37,830,000 PV of interest payable semiannually ($3,900,000 X 5.9713) 23,288,070 Total price 61,118,070 Calulation of Discount on Issue of Bonds Market Value of Bonds payable 65,000,000 PV of $65,000,000 due in 8 periods at 7% ($524800 X 0.5820) 37,830,000 PV of interest payable semiannually ($3,900,000 X 5.9713) 23,288,070 Proceeds from sale of Bonds 61,118,070 Discount on Issue of Bonds 3,881,930 Answer 2.1 Cromley Motor Products Bond Discount Amortization Schedule Under Effective Interest Rate Method Year Interest Payment Interest Expense Discount Amortization Unamortized Discount Bond Carrying Value A = 65,000,000 X 6% B = Preceding Bond Carrying Value X 7% C = B-A E = 65,000,000 - D 1/2/16 3,881,930 61,118,070 31/7/16 3,900,000 4,278,265 378,265 3,503,665 61,496,335 31/1/17 3,900,000 4,304,743 404,743 3,098,922 61,901,078 31/7/17 3,900,000 4,333,075 433,075 2,665,846 62,334,154 31/1/18 3,900,000 4,363,391 463,391 2,202,455 62,797,545 31/7/18 3,900,000 4,395,828 495,828 1,706,627 63,293,373 31/1/19 3,900,000 4,430,536 530,536 1,176,091 63,823,909 31/7/19 3,900,000 4,467,674 567,674 608,418 64,391,582 31/1/20 3,900,000 4,508,418 608,418 (0) 65,000,000 Answer 2.2 Barnwell Industries Bond Discount Amortization Schedule Under Effective Interest Rate Method Year Interest Received Interest Income Discount Amortization Unamortized Discount Bond Carrying Value A = 65,000 X 6% B = Preceding Bond Carrying Value X 7% C = B-A E = 65,000 - D 1/2/16 3,882 61,118 31/7/16 3,900 4,278 378 3,504 61,496 31/1/17 3,900 4,305 405 3,099 61,901 31/7/17 3,900 4,333 433 2,666 62,334 31/1/18 3,900 4,363 463 2,202 62,798 31/7/18 3,900 4,396 496 1,707 63,293 31/1/19 3,900 4,431 531 1,176 63,824 31/7/19 3,900 4,468 568 608 64,392 31/1/20 3,900 4,508 608 0 65,000 Answer 3. Cromley Motor Products Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1/2/16 Cash Dr. 61,118,070 Discount on Issue of Bonds Dr. 3,881,930 To Bonds Payable 65,000,000 (issue of Bonds at discount) Barnwell Industries Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1/2/16 Investment in Bonds Dr. 65000 To Cash 61,118 To Discount on Bonds Investments 3,882 (purchase of Bonds at discount) Answer 4. Cromley Motor Products Journal Entry Date Particulars Dr. Amt. Cr. Amt. 31/7/16 Interest Exp. Dr. 4,278,265 To Discount on Bonds Payable 378,265 To Cash 3,900,000 (Interest paid) 31/1/17 Interest Exp. Dr. 4,304,743 To Discount on Bonds Payable 404,743 To Interest Payable 3,900,000 (Interest paid) 31/7/17 Interest Exp. Dr. 4,333,075 To Discount on Bonds Payable 433,075 To Cash 3,900,000 (Interest paid) 31/1/18 Interest Exp. Dr. 4,363,391 To Discount on Bonds Payable 463,391 To Cash 3,900,000 (Interest paid) Barnwell Industries Journal Entry Date Particulars Dr. Amt. Cr. Amt. 31/7/16 Cash Dr. 3,900 Discount on Bond Investment Dr. 378 To Interest Revenue 4,278 (Interest Recd) 31/1/17 Cash Dr. 3,900 Discount on Bond Investment Dr. 405 To Interest Revenue 4,305 (Interest Recd) 31/7/17 Cash Dr. 3,900 Discount on Bond Investment Dr. 433 To Interest Revenue 4,333 (Interest Recd) 31/1/18 Cash Dr. 3,900 Discount on Bond Investment Dr. 463 To Interest Revenue 4,363 (Interest Recd)
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