Question

Exercise 14-7 (Algo) Determine the price of bonds; issuance; straight-line method [LO14-2] Universal Foods issued 12% bonds, dated January 1, with a face amount of $200 million on January 1, 2021. The bonds mature on December 31, 2030 (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, 2021. 2. to 4. Prepare the journal entries to record their issuance by Universal Foods on January 1, 2021, interest on June 30, 2021 and interest on December 31, 2028. Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Req 1 Reg 2 to 4 Prepare the journal entries to record their issuance by Universal Foods on January 1, 2021, interest on June 30, 2021 and interest 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.)
Please prepare the journal entries and answer everything wrong.

Answer 1

Answer to Requirement 1:

Face Value of Bonds = $200,000,000

Annual Coupon Rate = 12.00%
Semiannual Coupon Rate = 6.00%
Semiannual Coupon = 6.00% * $200,000,000
Semiannual Coupon = $12,000,000

Time to Maturity = 10 years
Semiannual Period = 20

Annual Interest Rate = 14.00%
Semiannual Interest Rate = 7.00%

Issue Value of Bonds = $12,000,000 * PVA of $1 (7.00%, 20) + $200,000,000 * PV of $1 (7.00%, 20)
Issue Value of Bonds = $12,000,000 * 10.59401 + $200,000,000 * 0.25842
Issue Value of Bonds = $178,812,120

Answer to Requirement 2 to 4:

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $200,000,000 - $178,812,120
Discount on Bonds = $21,187,880

Semiannual Amortization of Discount = Discount on Bonds / Semiannual Period
Semiannual Amortization of Discount = $21,187,880 / 20
Semiannual Amortization of Discount = $1,059,394

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $12,000,000 + $1,059,394
Semiannual Interest Expense = $13,059,394

Credit Date Jan. 01, 2021 Debit 178,812,120 21,187,880 200,000,000 June 30, 2021 13,059,394 Accounts and Explanation Cash Discount on Bonds Payable Bonds Payable Interest Expense Discount on Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash Bonds Payable Cash 1,059,394 12,000,000 Dec. 31, 2021 13,059,394 1,059,394 12,000,000 Dec. 31, 2028 200,000,000 200,000,000