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 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.

Homework Answers

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
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