Question

Universal Foods issued 12% bonds, dated January 1, with a face amount of $200 million on January 1, 2013. The bonds mature on December 31, 2027 (10 years). The market rate of interest for similar issues was 14%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. (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 at January 1, 2013. (Enter your answer in whole dollars.)

     

  

2.	Prepare the journal entry to record their issuance by Universal Foods on January 1, 2013. (Enter your answers in whole dollars. If no entry is required for a transaction, select "No journal entry required" in the first account field.)

     

  

3.	Prepare the journal entry to record interest on June 30, 2013. (Enter your answers in whole dollars. If no entry is required for a transaction, select "No journal entry required" in the first account field.)

     

   

4.	Prepare the journal entry to record interest on December 31, 2020.(Enter your answers in whole dollars. If no entry is required for a transaction, select "No journal entry required" in the first account field.)

     

Answer 1

Computation of Price of Bond

Price of Bond = PV of Interest Payment for 10 year + PV of Face value at end of year 10

= ( Half yearly Interest AmountX Cumm PVF @7% for 20 )+ ( Face value X PVF@14% at 10)

=(200X6%X10.594)+(200X0.50835)

228.798 million

2. Journal Entries for issuance of Bond ( $ in Million)
Date	Particulars	Debit	Credit
01-01-2013	Cash	$228.80
	Premum on issue of bond		$28.80
	Bond Payable		200
3. Journal Entries to record interest of Bond ( $ in Million)
Date	Particulars	Debit	Credit
30-06-2013	Interest expense	10.56
	Premum on issue of bond (28.80/20)	$1.44
	cash( 200 *6%)		12
4. Journal Entries to record interest of Bond ( $ in Million)
Date	Particulars	Debit	Credit
31-12-2020	Interest expense	10.56
	Premum on issue of bond (28.80/20)	$1.44
	cash( 200 *6%)		12