Universal Foods issued 12% bonds, dated January 1, with a face amount of $125 mi
ID: 2533372 • Letter: U
Question
Universal Foods issued 12% bonds, dated January 1, with a face amount of $125 million on January 1, 2018. The bonds mature December 31, 2027 (10 years). The market rate of interest for similar issues was 14%. Interest is paid semiannually on June 30 a December 31. Universal uses the straight-line method. (FV of $1. PV of $1. FVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) (Us appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds at January 1, 2018. 2. to 4. Prepare the journal entry to record their issuance by Universal Foods on January 1, 2018, interest on June 30, 2018 and on December 31, 2025. Complete this question by entering your answers in the tabs below Req 1 Req 2 to 4 Determine the price of the bonds at January 1, 2018. (Enter your answers in whole dollars.) Table values are based on: 20 Cash Flow Interest Principa Amount Present Value $ 125,000,000 Price of bondsExplanation / Answer
1.Determine the price of the Bond (Rounded)
Present Value of Bond
= Present Value of Face Value + Present Value of Interest
= $12,50,00,000 x (PVF 7%, 20Years) + $75,00,000 x (PVAF 7%, 20Year)
= ($12,50,00,000 x 0.25842) + ($7500000 x 10.59401)
= $ 3,23,02,500 + $ 7,94,55,075
= $1,04,806.46
= $ 11,17,57,575
N
20 Years
I
7%
Cash Flow
Amount
Present Value
Interest
$75,00,000
$ 3,23,02,500
Principal
$12,50,00,000
$7,94,55,075
Price of Bond
$11,17,57,575
Journal Entries
January 1,2018
Cash A/c
$11,17,57,575
Discount on Bond Payable A/c
$1,32,42,425
To Bond Payable
$12,50,00,000
June 30,2018
Interest Expenses A/c
$81,62,121
To Discount on Bond Payable A/c
$6,62,121
To Cash A/c
$75,00,000
December 31,2025
Interest Expenses A/c
$81,62,121
To Discount on Bond Payable A/c
$6,62,121
To Cash A/c
$75,00,000
Amortisation of Discounts in each year= $1,32,42,425 / 20 Years = $6,62,121
N
20 Years
I
7%
Cash Flow
Amount
Present Value
Interest
$75,00,000
$ 3,23,02,500
Principal
$12,50,00,000
$7,94,55,075
Price of Bond
$11,17,57,575
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