Exercise 14-3 (Algo) Determine the price of bonds; issuance; effective interest [LO14-2] The Bradford Company issued 10% bonds, dated January 1, with a face amount of $98 million on January 1, 2021. The bonds mature on December 31, 2030 (10 years). For bonds of similar risk and maturity, the market yield is 12%. 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) Required: 1. Determine the price of the bonds at January 1, 2021. 2. to 4. Prepare the journal entries to record their issuance by The Bradford Company on January 1, 2021, interest on June 30, 2021 and interest on December 31, 2021 (at the effective rate).

1. Determine the price of the bonds at January 1, 2021.

issuance price = $86,759,373

2. to 4. Prepare the journal entries to record their issuance by The Bradford Company on January 1, 2021, interest on June 30, 2021 and interest on December 31, 2021 (at the effective rate).

January 1, 2021, bonds are issued

Dr Cash 86,759,373

Dr Discount on bonds payable 11,240,627

Cr Bonds payable 98,000,000

June 30, 2021, first coupon payment

Dr Interest expense 5,205,562

Cr Cash 4,900,000

Cr Discount on bonds payable 305,562

December 31, 2021, second coupon payment

Dr Interest expense 5,223,896

Cr Cash 4,900,000

Cr Discount on bonds payable 323,896

Explanation:

Bradford company issued $98,000,000 in 10% bonds, with a 10 year maturity, semiannual coupons ($4,900,000).

Market interest rate 12%

price at issuance = PV of face value + PV of coupons

PV of face value = $98,000,000 / (1 + 6%) ²⁰ = $30,556,863

PV of coupons = $4,900,000 x 11.4699 (annuity factor 6%, n = 20) = $56,202,510

issuance price = $86,759,373

bond discount amortization on first payment:

($86,759,373 x 6%) - $4,900,000 = $5,205,562 - $4,900,000 = $305,562

bond discount amortization on second payment:

($87,064,935 x 6%) - $4,900,000 = $5,223,896 - $4,900,000 = $323,896