Question

On January 1, 2021, Instaform, Inc., issued 10% bonds with a face amount of $51 million, dated January 1. The bonds mature in 2040 (20 years). The market yield for bonds of similar risk and maturity is 12%. Interest is paid semiannually.

Required: 1-a. Determine the price of the bonds at January 1, 2021.

1-b. Prepare the journal entry to record their issuance by Instaform.

2-a. Assume the market rate was 9%. Determine the price of the bonds at January 1, 2021.

2-b. Assume the market rate was 9%. Prepare the journal entry to record their issuance by Instaform.

3. Assume Broadcourt Electronics purchased the entire issue in a private placement of the bonds. Using the data in requirement 2, prepare the journal entry to record the purchase by Broadcourt.

Answer 1

Solution 1a:

Computation of bond price
Table values are based on:
n=	40
i=	6.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.09722	$51,000,000.00	$4,958,220
Interest (Annuity)	15.04630	$2,550,000.00	$38,368,065
Price of bonds			$43,326,285

Solution 1b:

Journal Entries - Instaform Inc.
Event	Particulars	Debit	Credit
1-Jan-21	Cash Dr	$43,326,285.00
	Discount on issue of bond Dr	$7,673,715.00
	To Bond Payable		$51,000,000.00
	(To record issue of bond at discount)

Solution 2a:

Computation of bond price
Table values are based on:
n=	40
i=	4.50%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.17193	$51,000,000.00	$8,768,430
Interest (Annuity)	18.40158	$2,550,000.00	$46,924,029
Price of bonds			$55,692,459

solution 2b:

Journal Entries - Instaform Inc.
Date	Particulars	Debit	Credit
1-Jan-21	Cash Dr	$55,692,459.00
	To Bond Payable		$51,000,000.00
	To Premium on Bond Payable		$4,692,459.00
	(To record issue of bond at premium)

Solution 3:

Journal Entries - Broadcourt Electronics
Date	Particulars	Debit	Credit
1-Jan-21	Investment in Bond Dr	$51,000,000.00
	Premium on bond investment Dr	$4,692,459.00
	To Cash		$55,692,459.00
	(To record investment in bond)