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The Bradford Company issued 12% bonds, dated January 1, with a face amount of $81 million on January 1, 2018. The bonds mature on December 31, 2027 (10 years). For bonds of similar risk and maturity, the market yield is 14%. Interest is paid 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. Determine the price of the bonds at January 1, 2018. 2. to 4. Prepare the journal entry to record their issuance by The Bradford Company on January 1, 2018, interest on June 30, 2018 and interest on December 31, 2018 (at the effective rate).

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jepessoa

Answer:

$81 million in bonds issued January 1, 2018

coupon rate 12%, semiannual 6% interest

maturity = 10 years x 2  = 20 periods

market interest rate = 14% / 2 = 7% semiannual

1) market price of the bonds:

PV of face value = $81,000,000 / (1 + 7%)²⁰ = $20,931,939.23

PV of coupon payments = $4,860,000 x 10.59401 (PV annuity factor, 7%, 20 periods) = $51,486,888.60

market price = $72,418,827.83 ≈  $72,418,828

2) January 1, 2018, bonds issued at a discount

Dr Cash 72,418,828

Dr Discount on bonds payable 8,581,172

    Cr Bonds payable 81,000,000

3) June 30, 2018, first coupon payment

Dr Interest expense 4,999,318

    Cr Cash 4,860,000

    Cr Discount on bonds payable 139,318

amortization of bond discount = ($72,418,828 x 7%) - $4,860,000 = $4,999,318 - $4,860,000 = $139,318

4) December 31, 2018, second coupon payment

Dr Interest expense 5,079,070

    Cr Cash 4,860,000

    Cr Discount on bonds payable 219,070

amortization of bond discount = ($72,558,146 x 7%) - $4,860,000 = $5,079,070 - $4,860,000 = $219,070