On February 1, 2018, Cromley Motor Products issued 6% bonds, dated February 1, w
ID: 2532392 • Letter: O
Question
On February 1, 2018, Cromley Motor Products issued 6% bonds, dated February 1, with a face amount of $90 million. The bonds mature on January 31, 2022 (4 years). The market yield for bonds of similar risk and maturity was 8%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $90,000 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.)
Required:
1. Determine the price of the bonds issued on February 1, 2018.
2-a. Prepare amortization schedules that indicate Cromley’s effective interest expense for each interest period during the term to maturity.
2-b. Prepare amortization schedules that indicate Barnwell’s effective interest revenue for each interest period during the term to maturity.
3. Prepare the journal entries to record the issuance of the bonds by Cromley and Barnwell’s investment on February 1, 2018.
4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2020.
Explanation / Answer
Answer 1. Table Value Based on n= 8 (4 Year X 2) i= 4.00% (8% / 2) Cash Flow Amount Present Value Interest - $90,000,000 X 6% X 6/12 2,700,000 18,178,411 ($8,000 X 6.73274) Principal 90,000,000 65,762,118 ($90,000,000 X 0.73069) Issue Price of Bonds 83,940,530 Discount on issue of Bonds 6,059,470 Answer 2-a. Cromley Motor Products Bond Discount Amortization Schedule Date Interest Paid - $90,000,000 X 6% X 6/12 Interest Expense - Preceeding Bond Carrying Value X 8% X 6/12 Discount Amortization Unamortized Discount Bonds Carrying Amount A B C = B-A D = D - C E = $90,000,000 - D 1-Feb-18 - - - 6,059,470 83,940,530 31-Jul-18 2,700,000 3,357,621 657,621 5,401,849 84,598,151 31-Jan-19 2,700,000 3,383,926 683,926 4,717,923 85,282,077 31-Jul-19 2,700,000 3,411,283 711,283 4,006,640 85,993,360 31-Jan-20 2,700,000 3,439,734 739,734 3,266,906 86,733,094 31-Jul-20 2,700,000 3,469,324 769,324 2,497,582 87,502,418 31-Jan-21 2,700,000 3,500,097 800,097 1,697,485 88,302,515 31-Jul-21 2,700,000 3,532,101 832,101 865,385 89,134,615 31-Jan-22 2,700,000 3,565,385 865,385 0 90,000,000 Answer 2-b. 83940.52961 Barnwell purchased Bonds (Face Value) = $90,000 Amount to be Paid by Barnwell for Bonds = $90,000 X $83,940,530 / $90,000,000 Amount to be Paid by Barnwell for Bonds = $83,940.53 or say $83,941 (approx.) Barnwell Industries Bond Discount Amortization Schedule Date Interest Recd - $90,000 X 6%X6/12 Interest Revenue - Preceeding Bond Carrying Value X 8% X 6/12 Discount Amortization Unamortized Discount Bonds Carrying Amount A B C = B-A D = D - C E = $90,000 - D 1-Feb-18 - - - 6,059 83,941 31-Jul-18 2,700 3,358 658 5,401 84,599 31-Jan-19 2,700 3,384 684 4,717 85,283 31-Jul-19 2,700 3,411 711 4,006 85,994 31-Jan-20 2,700 3,440 740 3,266 86,734 31-Jul-20 2,700 3,469 769 2,497 87,503 31-Jan-21 2,700 3,500 800 1,697 88,303 31-Jul-21 2,700 3,532 832 865 89,135 31-Jan-22 2,700 3,565 865 (0) 90,000 Answer 3 & 4. Books of Cromley Motor Products Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-Feb-18 Cash 83,940,530 Discount on Issue of Bonds 6,059,470 Bonds Payable 90,000,000 (record the issue of bonds) 31-Jul-18 Interest Expense 3,357,621 Discount on issue of Bonds 657,621 Cash 2,700,000 (Record the interest paid) 31-Dec-18 Interest Expense 2,819,938 Discount on issue of Bonds 569,938 Interest Payable 2,250,000 (Record the interest Due) 31-Jan-19 Interest Expense 563,988 Interest Payable 2,250,000 Discount on issue of Bonds 113,988 Cash 2,700,000 (record the interest paid) 31-Jul-19 Interest Expense 3,411,283 Discount on issue of Bonds 711,283 Cash 2,700,000 (Record the interest paid) 31-Dec-19 Interest Expense 2,866,445 Discount on issue of Bonds 616,445 Interest Payable 2,250,000 (Record the interest Due) 31-Jan-20 Interest Expense 573,289 Interest Payable 2,250,000 Discount on issue of Bonds 123,289 Cash 2,700,000 (record the interest paid) Books of Barnwell Industries Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-Feb-18 Investment in Bonds 90,000 Cash 83,941 Discount on Bonds Investments 6,059 (record the Bonds Purchased) 31-Jul-18 Cash 2,700 Discount on Bonds Investment 658 Interest Revenue 3,358 (record the interest received) 31-Dec-18 Interest Receivable 2,250 Discount on Bonds Investment 570 Interest Revenue 2,820 (record the interest receivable) 31-Jan-19 Cash 2,700 Discount on Bonds Investment 114 Interest Revenue 564 Interest Receivable 2,250 (Record the interest received) 31-Jul-19 Cash 2,700 Discount on Bonds Investment 711 Interest Revenue 3,411 (record the interest received) 31-Dec-19 Interest Receivable 2,250 Discount on Bonds Investment 616 Interest Revenue 2,866 (record the interest receivable) 31-Jan-20 Cash 2,700 Discount on Bonds Investment 123 Interest Revenue 573 Interest Receivable 2,250 (Record the interest received)
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