Question

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 12%. Interest is paid semiannually on June 30 and December 31. International uses the straight-line 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 June 30, year 1.

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

Answer 1

Table values are based on:
Face Amount	$140,000,000
Interest Payment	$140,000,000*10%*6/12 =$7,000,000
Market Interest rate per period	2.50%
Cash Flow	Table Value(PV of 6% for 30 period)	Amount	Present Value
PV of Interest	13.76843	$70,00,000	$9,63,79,010
PV of Principal	0.17411	$14,00,00,000	$2,43,75,400
PV of Bonds Payable(Issue Price)			$12,07,54,410
Discount on Bonds =$140,000,000 - $120,754,410 =$19,245,590
Discount amortization on each period =$19,245,590 / 30 =$641,520
Interest paid in cash in each period =$7,000,000
Interest expenses for each period =$641,520 + $7,000,000 =$7,641,520
Date	Interest Payment	Interest expenses	Discount amorrtization	Bond carrying amount
Jan 1,Year 1				12,07,54,410
Jun 30,Year 1	70,00,000	76,41,520	6,41,520	12,13,95,930
Dec 31,Year 1	70,00,000	76,41,520	6,41,520	12,20,37,450
Jun 30,Year 2	70,00,000	76,41,520	6,41,520	12,26,78,970
Dec 31,Year 2	70,00,000	76,41,520	6,41,520	12,33,20,490
Jun 30,Year 3	70,00,000	76,41,520	6,41,520	12,39,62,010
Dec 31,Year 3	70,00,000	76,41,520	6,41,520	12,46,03,530
Jun 30,Year 4	70,00,000	76,41,520	6,41,520	12,52,45,050
Dec 31,Year 4	70,00,000	76,41,520	6,41,520	12,58,86,570
Jun 30,Year 5	70,00,000	76,41,520	6,41,520	12,65,28,090
Dec 31,Year 5	70,00,000	76,41,520	6,41,520	12,71,69,610
Jun 30,Year 6	70,00,000	76,41,520	6,41,520	12,78,11,130
Dec 31,Year 6	70,00,000	76,41,520	6,41,520	12,84,52,650
Jun 30,Year 7	70,00,000	76,41,520	6,41,520	12,90,94,170
Dec 31,Year 7	70,00,000	76,41,520	6,41,520	12,97,35,690
Jun 30,Year 8	70,00,000	76,41,520	6,41,520	13,03,77,210
Dec 31,Year 8	70,00,000	76,41,520	6,41,520	13,10,18,730
Jun 30,Year 9	70,00,000	76,41,520	6,41,520	13,16,60,250
Dec 31,Year 9	70,00,000	76,41,520	6,41,520	13,23,01,770
Jun 30,Year 10	70,00,000	76,41,520	6,41,520	13,29,43,290
Dec 31,Year 10	70,00,000	76,41,520	6,41,520	13,35,84,810
Jun 30,Year 11	70,00,000	76,41,520	6,41,520	13,42,26,330
Dec 31,Year 11	70,00,000	76,41,520	6,41,520	13,48,67,850
Jun 30,Year 12	70,00,000	76,41,520	6,41,520	13,55,09,370
Dec 31,Year 12	70,00,000	76,41,520	6,41,520	13,61,50,890
Jun 30,Year 13	70,00,000	76,41,520	6,41,520	13,67,92,410
Dec 31,Year 13	70,00,000	76,41,520	6,41,520	13,74,33,930
Jun 30,Year 14	70,00,000	76,41,520	6,41,520	13,80,75,450
Dec 31,Year 14	70,00,000	76,41,520	6,41,520	13,87,16,970
Jun 30,Year 15	70,00,000	76,41,520	6,41,520	13,93,58,490
Dec 31,Year 15	70,00,000	76,41,510	6,41,510	14,00,00,000
Date	Accounts and explanation	Debit(in $)	Credit(in $)
Jan 1, Year 1	Cash	$12,07,54,410
	Discount on issue of Bonds	$1,92,45,590
	Bonds Payable		$14,00,00,000
Jun 30, Year 1	Interest Expenses	76,41,520
	Discount on issue of Bonds		6,41,520
	Cash		70,00,000
Dec 31,Year 7	Interest Expenses	76,41,520
	Discount on issue of Bonds		6,41,520
	Cash		70,00,000