Question

# International Foods issued 10% bonds, dated January 1, with a face amount of \$140 million on...

International Foods issued 10% bonds, dated January 1, with a face amount of \$140 million on January 1, year 1. The bonds mature on December 31, after 15 years. The market rate of interest for similar issues was 8%. Interest is paid annually on December 31. International uses the effective interest method.

Required:

1. Determine the price of the bonds at January 1, year 1.

2. Prepare the journal entry to record their issuance by International Foods on January 1, year 1.

3. Prepare the amortization schedule for bond’s duration

4. Prepare the journal entry to record interest on December 31, year 7.

 Coupon Rate per period 10% Period 15 Effective/Market rate per period 8.0% Bond amount \$140,000,000 Period Cashflows Present value Calculation 1 \$14,000,000 \$12,962,963 (14000000/(1+0.08)^1) 2 \$14,000,000 \$12,002,743 (14000000/(1+0.08)^2) 3 \$14,000,000 \$11,113,651 (14000000/(1+0.08)^3) 4 \$14,000,000 \$10,290,418 (14000000/(1+0.08)^4) 5 \$14,000,000 \$9,528,165 (14000000/(1+0.08)^5) 6 \$14,000,000 \$8,822,375 (14000000/(1+0.08)^6) 7 \$14,000,000 \$8,168,866 (14000000/(1+0.08)^7) 8 \$14,000,000 \$7,563,764 (14000000/(1+0.08)^8) 9 \$14,000,000 \$7,003,486 (14000000/(1+0.08)^9) 10 \$14,000,000 \$6,484,709 (14000000/(1+0.08)^10) 11 \$14,000,000 \$6,004,360 (14000000/(1+0.08)^11) 12 \$14,000,000 \$5,559,593 (14000000/(1+0.08)^12) 13 \$14,000,000 \$5,147,771 (14000000/(1+0.08)^13) 14 \$14,000,000 \$4,766,455 (14000000/(1+0.08)^14) 15 \$154,000,000 \$48,547,223 (154000000/(1+0.08)^15) \$163,966,540 1 Selling price of bonds at Jan 1, Year \$163,966,540 2 Account titles and explanation Debit Credit Cash \$163,966,540 Premium on issue of bonds \$23,966,540 Bonds payable \$140,000,000 (Bonds issued at premium) Amortization Schedule Period Cash paid Interest Closing bal. 0 0 \$0 \$163,966,540 1 \$14,000,000 \$13,117,323 \$163,083,864 2 \$14,000,000 \$13,046,709 \$162,130,573 3 \$14,000,000 \$12,970,446 \$161,101,018 4 \$14,000,000 \$12,888,081 \$159,989,100 5 \$14,000,000 \$12,799,128 \$158,788,228 6 \$14,000,000 \$12,703,058 \$157,491,286 7 \$14,000,000 \$12,599,303 \$156,090,589 8 \$14,000,000 \$12,487,247 \$154,577,836 9 \$14,000,000 \$12,366,227 \$152,944,063 10 \$14,000,000 \$12,235,525 \$151,179,588 11 \$14,000,000 \$12,094,367 \$149,273,955 12 \$14,000,000 \$11,941,916 \$147,215,872 13 \$14,000,000 \$11,777,270 \$144,993,141 14 \$14,000,000 \$11,599,451 \$142,592,593 15 \$154,000,000 \$11,407,407 \$0 4 Interest expense \$12,599,303 Premium on issue of bond \$1,400,697 Cash \$14,000,000 (entry for year 7)

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