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
Present value of $$80 million: Table 2,, 8 periods
p @ 5% = 0.67684 x
$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.
Cromley Barnwell
Cash
C h Effective
Eff ti Discountt
Di Cash
C h Effective
Eff ti Di
Discountt
Pmt Payment Interest Amortization Balance Pmt Receipt Interest Amortization Balance
77,414,756 77,415
1 3,600,000 3,870,738 270,738 77,685,494 1 3,600 3,871 271 77,686
2 3,600,000 3,884,275 284,275 77,969,769 2 3,600 3,884 284 77,970
3 3,600,000 3,898,488 298,488 78,268,258 3 3,600 3,899 299 78,269
4 3,600,000 3,913,413 313,413 78,581,670 4 3,600 3,913 313 78,581
5 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
©Dr. Chula King
All Rights Reserved
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 80,000
Discount on bond investment 2,585
,
Cash 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 3,600,000
12/31/13 Interest Expense (3,884,275 x 5/6) 3,236,896
Discount on B/P (284,275 x 5/6) 236,896
Interest Payable (3,600,000 x 5/6) 3,000,000
1/31/14 I t
Interest
t Expense
E (3,884,275
(3 884 275 x 1/6) 647 379
647,379
Interest Payable 3,000,000
Discount on B/P (284,275 x 1/6) 47,379
Cash 3,600,000
©Dr. Chula King
All Rights Reserved
Problem 14-5 (continued)
Cromley
7/31/14 Interest Expense 3,898,488
Discount on B/P 298,488
Cash 3 600 000
3,600,000
12/31/14 Interest Expense (3,913,413 x 5/6) 3,261,177
Discount on B/P (313,413 x 5/6) 261,177
Interest Payable (3,600,000 x 5/6) 3,000,000
1/31/15 Interest Expense (3,913,413 x 1/6) 652,236
Interest Payable 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 3,600
Disc on Bond Invest 271
Interest Revenue 3,871
12/31/13 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) 3,237
1/31/14 C h
Cash 3 600
3,600
Disc on Bond Invest (284 x 1/6) 47
Interest Receivable 3,000
Interest Revenue (3,884 x 1/6) 647
©Dr. Chula King
All Rights Reserved
Problem 14-5 (continued)
Barnwell
7/31/14 Cash 3,600
Disc on Bond Invest 299
Interest Revenue 3,899
12/31/14 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) 3,261
1/31/15 Cash 3,600
Disc on Bond Invest (313 x 1/6) 52
Interest Receivable 3,000
Interest Revenue (3,913 x 1/6) 652
©Dr. Chula King
All Rights Reserved
