Question

Universal Foods issued 12% bonds, dated January 1, with a foce amount of $155 million on January 1, 2021 to Wang Communications. The bonds mature on December 31, 2035 (15 years). The market rate of Interest for similar issues was 14%. Interest is pald semiannually on June 30 and 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. to 3. Prepare the journal entries to record the purchase of the bonds by Wang Communications on January 1, 2021, interest revenue on June 30, 2021 and interest revenue on December 31, 2028. (Round final answers to the nearest whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Required:

Journal entries:

Date	General Journal	Debit	Credit
Jan 1, 2021	Investment in bonds	$155,000,000
	Cash		$135,770,700.
	Discount on investment in bonds		$19,229,300
June 30, 2021	Cash	$9,300,000
	Discount on investment in bonds	$640,977
	Interest revenue		$9,940,977
Dec 31, 2028	Cash	$9,300,000
	Discount on investment in bonds	$640,977
	Interest revenue		$9,940,977

Working:

• Interest revenue on bonds = Value of bonds * Stated interest rate

= $155,000,000 * (12% / 2)....(as interest is paid semi-annually)

= $155,000,000 * 6%

= $9,300,000

• Present value of bonds:

Market interest = (14% / 2) =7%

Life of bonds = (15 * 2) = 30 years

Present value of bonds = Value of bond * Present value annuity factor at (7%,30th)

= $155,000,000 * 0.1314 (approx)

= $20,367,000

Present value of interest received = Interest * Present value annuity factor at (7%,30)

= $9,300,000 * 12.4090 (approx)

= $115,403,700

Thus, Present value of bonds = $20,367,000 + $115,403,700 = $135,770,700.

• Discount on bonds = Face value - Present value of bonds

= $155,000,000 - $135,770,700

= $19,229,300.

• Discount amortization per semiannual period

= $19,229,300 / 30

= $640,977.