Universal Foods issued 10% bonds, dated January 1, with a face amount of $190 mi
ID: 2542956 • Letter: U
Question
Universal Foods issued 10% bonds, dated January 1, with a face amount of $190 million on January 1, 2018 to Wang Communications. The bonds mature on December 31, 2032 (15 years). The market rate of interest for similar issues was 12%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. Universal Foods sold the entire bond issue to Wang Communications. (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:
1-3. Prepare the journal entry to record the purchase of the bonds by Wang Communications on January 1, 2018, interest revenue on June 30, 2018 and interest revenue on December 31, 2025. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Explanation / Answer
Valuation of bond price = coupon * PVIFA(Yield% , n) + face value * PVIF(Yield% , n)
When interest is paid semi-annual, the interest rates are half and period gets double.
Valuation of bond price = (190m*5%) * PVIFA(6% ,30) + 190m * PVIF(6% ,30) = 9.5m*13.7648 + 190m*0.1741 = $163.8446m
discount value = 190m - 163.8446m = $26.1554m
Straight line amortisation of discount = 26.1554/30 = $0.87185m
Journal Entries in Wang Communications books:
Date Accounts Titles Debit $ Credit $ Jan 1 2018 Bond Receivable 190m Discount on Bond Receivable 26.1554m Cash 163.8446m (purchase of bonds at discount) June 30 2018 Cash (190m*5%) 13.7648m Discount on Bond issued 0.87185m Interest Revenue 14.63665m (interest revenue received for first 6 months)Related Questions
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