Problem 14-5
On February 1, 2013, Cromley Motor Products issued 9% bonds, dated
February 1, with a face amount of $80 million. The bonds mature on
January 31, 2017 (4 years). The market yield for bonds of similar risk
and maturity was 10%. Interest is payable semiannually on July 31,
and January 31. Barnwell Industries acquired $80,000 of the bonds as
a long-term
l
i
investment.
The
h fiscal
fi l year endd off both
b h firms
fi
is
i
December 31.
Part 1: Determine the price of the bonds issued on February 1, 2013.
Cromley: Cash interest paid: 9% x $80,000,000 x 6/12 = $3,600,000
Present value of interest: Table 4, 8 payments @ 5% = 6.46321 x
$3,600,000 = $23,267,556
p
@ 5% = 0.67684 x
Present value of $$80 million: Table 2,, 8 periods
$80,000,000 = $54,147,200
Price of bonds: $77,414,756 ($23,267,556 + $54,147,200)
Barnwell purchased 80,000 ÷ 80,000,000 = 0.1% of the bonds.
Therefore, the price paid was 0.1% x $77,414,756 = $77,415
©Dr. Chula King
All Rights Reserved
Problem 14-5 (continued)
Part 2: Prepare the amortization schedules that indicates (a) Cromley’s
effective interest expense and (b) Barnwell’s effective interest revenue
for each interest period during the term to maturity.
Barnwell
Cromley
Pmt
Cash
C
h
Payment
Effective
Eff
ti
Interest
Discountt
Di
Amortization
1
3,600,000
3,870,738
270,738
2
3,600,000
3,884,275
3
3,600,000
4
3,600,000
5
Pmt
Cash
C
h
Receipt
77,685,494
1
3,600
3,871
271
77,686
284,275
77,969,769
2
3,600
3,884
284
77,970
3,898,488
298,488
78,268,258
3
3,600
3,899
299
78,269
3,913,413
313,413
78,581,670
4
3,600
3,913
313
78,581
3,600,000
3,929,083
329,084
78,910,754
5
3,600
3,929
330
78,911
6
3,600,000
3,945,538
345,538
79,256,292
6
3,600
3,946
346
79,257
7
3,600,000
3,962,815
362,815
79,619,107
7
3,600
3,963
363
79,620
8
3,600,000
3,980,893
380,893
80,000,000
8
3,600
3,980
380
80,000
Balance
Effective
Eff
ti
Di
Discount
t
Interest Amortization
77,414,756
©Dr. Chula King
All Rights Reserved
Balance
77,415
Problem 14-5 (continued)
Part 3: Prepare the journal entries to record (a) the issuance of the bonds
by Cromley and (b) Barnwell’s investment on February 1, 2013.
Cromley:
Cash
77,414,756
Discount on B/P
2,585,244
Bonds Payable
80,000,000
Barnwell:
Investment in Bonds
Discount on bond investment
Cash
80,000
2,585
,
77,415
©Dr. Chula King
All Rights Reserved
Problem 14-5 (continued)
Part 4: Prepare the journal entries by both firms to record all subsequent
events related to the bonds through January 31, 2015.
Cromley
7/31/13
Interest Expense
3,870,738
Discount on B/P
270,738
Cash
12/31/13
Interest Expense (3,884,275 x 5/6)
3,600,000
3,236,896
Discount on B/P (284,275 x 5/6)
236,896
Interest Payable (3,600,000 x 5/6)
1/31/14
I t
Interest
t Expense
E
(3,884,275
(3 884 275 x 1/6)
Interest Payable
Discount on B/P (284,275 x 1/6)
Cash
©Dr. Chula King
All Rights Reserved
3,000,000
647 379
647,379
3,000,000
47,379
3,600,000
Problem 14-5 (continued)
Cromley
7/31/14
Interest Expense
3,898,488
Discount on B/P
298,488
Cash
12/31/14
Interest Expense (3,913,413 x 5/6)
3 600 000
3,600,000
3,261,177
Discount on B/P (313,413 x 5/6)
261,177
Interest Payable (3,600,000 x 5/6)
1/31/15
Interest Expense (3,913,413 x 1/6)
Interest Payable
3,000,000
652,236
3,000,000
Discount on B/P (313,413 x 1/6)
52,236
Cash
3,600,000
©Dr. Chula King
All Rights Reserved
Problem 14-5 (continued)
Part 4: Prepare the journal entries by both firms to record all subsequent
events related to the bonds through January 31, 2015.
Barnwell
7/31/13
Cash
Disc on Bond Invest
3,600
271
Interest Revenue
12/31/13
3,871
Interest Receivable (3,600 x 5/6)
3,000
Disc on Bond Invest (284 x 5/6)
237
Interest Revenue (3,884 x 5/6)
1/31/14
C h
Cash
Disc on Bond Invest (284 x 1/6)
Interest Receivable
Interest Revenue (3,884 x 1/6)
©Dr. Chula King
All Rights Reserved
3,237
3 600
3,600
47
3,000
647
Problem 14-5 (continued)
Barnwell
7/31/14
Cash
Disc on Bond Invest
3,600
299
Interest Revenue
12/31/14
3,899
Interest Receivable (3,600 x 5/6)
3,000
Disc on Bond Invest (313 x 5/6)
261
Interest Revenue (3,913 x 5/6)
1/31/15
Cash
Disc on Bond Invest (313 x 1/6)
Interest Receivable
Interest Revenue (3,913 x 1/6)
©Dr. Chula King
All Rights Reserved
3,261
3,600
52
3,000
652