Question

Exercise 14-7 Determine the price of bonds; issuance; straight-line method [LO14-2] Universal Foods issued 12% bonds, dated January 1, with a face amount of $225 million on January 1, 2018. 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, 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 interest on December 31, 2025. Complete this question by entering your answers in the tabs below. Req 2 to 4 Req 1 Determine the price of the bonds at January 1, 2018. (Enter your answers in whole dollars.) Table values are based on: i = Cash Flow Amount Present Value Interest Principal Price of bonds

Answer 1

1)

Table values are based on:
n=	(10*2)= 20
i=	(14%/2)= 7%
Cash Flow	Amount	Present Value
Interest	$13500000	$143019135
Principal	225000000	58144500
Price of bonds		$201163635

Interest= $225000000*12%*6/12= $13500000

Present value of Interest= $13500000*10.59401= $143019135

Present value of Principal= $225000000*0.25842= $58144500

2 to 4)

Date	Account titles and explanation	Debit	Credit
Jan 1, 2018	Cash	$201163635
	Discount on bonds payable (225000000-201163635)	$23836365
	Bonds payable		$225000000
	(To record issuance of bonds)
June 30, 2018	Interest expense (13500000+1191818)	$14691818
	Discount on bonds payable (23836365/20)		$1191818
	Cash (225000000*12%*6/12)		$13500000
	(To record interest expense)
Dec 31, 2025	Interest expense (13500000+1191818)	$14691818
	Discount on bonds payable (23836365/20)		$1191818
	Cash (225000000*12%*6/12)		$13500000
	(To record interest expense)