On February 1 2018 Cromley Motor Products issued 12 bonds da

On February 1, 2018, Cromley Motor Products issued 12% bonds, dated February 1, with a face amount of $65 million. The bonds mature on January 31, 2022 (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.)

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.

Solution

Answer 1. Table Value Based on n= 8 (4 Year X 2) i= 7.00% (14% / 2) Cash Flow Amount Present Value Interest - $65,000,000 X 12% X 6/12          3,900,000                                  23,288,064 ($8,000 X 5.97130) Principal        65,000,000                                  37,830,592 ($65,000,000 X 0.58201) Issue Price of Bonds                                  61,118,656 Discount on issue of Bonds                                     3,881,344 Answer 2-a. Cromley Motor Products Bond Discount Amortization Schedule Date Interest Paid - $65,000,000 X 12%X6/12 Interest Expense - Preceeding Bond Carrying Value X 14% X 6/12 Discount Amortization Unamortized Discount Bonds Carrying Amount A B C = B-A D = D - C E = $65,000,000 - D 1-Feb-18                                    -                                      -                                      -                  3,881,344                61,118,656 31-Jul-18                     3,900,000                    4,278,306                         378,306                3,503,038                61,496,962 31-Jan-19                     3,900,000                    4,304,787                         404,787                3,098,251                61,901,749 31-Jul-19                     3,900,000                    4,333,122                         433,122                2,665,128                62,334,872 31-Jan-20                     3,900,000                    4,363,441                         463,441                2,201,687                62,798,313 31-Jul-20                     3,900,000                    4,395,882                         495,882                1,705,805                63,294,195 31-Jan-21                     3,900,000                    4,430,594                         530,594                1,175,212                63,824,788 31-Jul-21                     3,900,000                    4,467,735                         567,735                   607,477                64,392,523 31-Jan-22                     3,900,000                    4,507,477                         607,477                                0                65,000,000 Answer 2-b. Barnwell purchased Bonds (Face Value) = $65,000 Amount to be Paid by Barnwell for Bonds = $65,000 X $61,118,656 / $65,000,000 = $61,118.72 or say $61,119 Amount to be Paid by Barnwell for Bonds = $61,118.66 or say $61,119 (approx.) Barnwell Industries Bond Discount Amortization Schedule Date Interest Recd - $65,000 X 12%X6/12 Interest Expense - Preceeding Bond Carrying Value X 14% X 6/12 Discount Amortization Unamortized Discount Bonds Carrying Amount A B C = B-A D = D - C E = $65,000 - D 1-Feb-18                                    -                                      -                                      -                          3,881                         61,119 31-Jul-18                             3,900                             4,278                                 378                        3,503                         61,497 31-Jan-19                             3,900                             4,305                                 405                        3,098                         61,902 31-Jul-19                             3,900                             4,333                                 433                        2,665                         62,335 31-Jan-20                             3,900                             4,363                                 463                        2,201                         62,799 31-Jul-20                             3,900                             4,396                                 496                        1,705                         63,295 31-Jan-21                             3,900                             4,431                                 531                        1,175                         63,825 31-Jul-21                             3,900                             4,468                                 568                            607                         64,393 31-Jan-22                             3,900                             4,507                                 607                                0                         65,000 Answer 3 & 4. Books of Cromley Motor Products Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-Feb-18 Cash          61,118,656 Discount on Issue of Bonds            3,881,344 Bonds Payable          65,000,000 (record the issue of bonds) 31-Jul-18 Interest Expense            4,278,306 Discount on issue of Bonds                378,306 Cash            3,900,000 (Record the interest paid) 31-Dec-18 Interest Expense            3,587,323 $4,304,787 X 5/6 Discount on issue of Bonds                337,323 $404,787 X 5/6 Interest Payable            3,250,000 $3,900,000 X 5/6 (Record the interest Due) 31-Jan-19 Interest Expense                717,464 $4,304,787 X 1/6 Interest Payable            3,250,000 Discount on issue of Bonds                  67,464 $404,787 X 1/6 Cash            3,900,000 (record the interest paid) 31-Jul-19 Interest Expense            4,333,122 Discount on issue of Bonds                433,122 Cash            3,900,000 (Record the interest paid) 31-Dec-19 Interest Expense            3,636,201 $4,363,441 X 5/6 Discount on issue of Bonds                386,201 $463,441 X 5/6 Interest Payable            3,250,000 $3,900,000 X 5/6 (Record the interest Due) 31-Jan-20 Interest Expense                727,240 $4,363,441 X 1/6 Interest Payable            3,250,000 Discount on issue of Bonds                  77,240 $463,441 X 1/6 Cash            3,900,000 (record the interest paid) Books of Barnwell Industries Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-Feb-18 Investment in Bonds                  65,000 Cash                  61,119 Discount on Bonds Investments                     3,881 (record the Bonds Purchased) 31-Jul-18 Cash                     3,900 Discount on Bonds Investment                        378    Interest Revenue                     4,278 (record the interest received) 31-Dec-18 Interest Receivable                     3,250 $3,900 x 5/6 Discount on Bonds Investment                        337 $405 X 5/6    Interest Revenue                     3,587 $4305*5/6 (record the interest receivable) 31-Jan-19 Cash                     3,900 Discount on Bonds Investment                           68 $405 X 1/6    Interest Revenue                        718 $4,305 X 1/6    Interest Receivable                     3,250 (Record the interest received) 31-Jul-19 Cash                     3,900 Discount on Bonds Investment                        433    Interest Revenue                     4,333 (record the interest received) 31-Dec-19 Interest Receivable                     3,250 $3,900 X 5/6 Discount on Bonds Investment                        386 $463 X 5/6    Interest Revenue                     3,636 $4,363 X 5/6 (record the interest receivable) 31-Jan-20 Cash                     3,900 Discount on Bonds Investment                           77 $463 X 1/6    Interest Revenue                        727 $4,363 X 1/6    Interest Receivable                     3,250 (Record the interest received)