Problem 14-1

On January 1, 2013, Instaform, Inc., issued 10% bonds with a face

amount of $50 million, dated January 1. The bonds mature in 2032
(20 years). The market yield for bonds of similar risk and maturity is
12%. Interest is paid semiannually.
Part 1: Determine the price of the bonds at January 1, 2013, and prepare
the journal entry to record their issuance by Instaform.
Semiannual cash interest: 10% x 50,000,000 x 6/12 = $2,500,000
Due at maturity: $50,000,000
Present value of interest: Table 4, 40 payments @ 6% = 15.04630 x
2,500,000 = $37,615,750
Present value of $50,000,000: Table 2, 40 periods @ 6% = 0.09722 x
50,000,000 = $4,861,000
Price of bonds: $37,615,750 + $4,861,000 = $42,476,750
Cash 42,476,750
Discount on B/P 7,523,250
Bonds Payable 50,000,000
©Dr. Chula King
All Rights Reserved

Problem 14-1 (continued)

Part 2: Assume the market rate was 9%. Determine the price of the
bonds at January 1, 2013, and prepare the journal entry to record their
issuance by Instaform.
Semiannual cash interest: 10% x 50,000,000 x 6/12 = $2,500,000
Due at maturity: $50,000,000
Present value of interest: Table 4, 40 payments @ 4.5% = 18.40158 x
2,500,000 = $46,003,950
Present value
l off $50,000,000:
$ Table
bl 2, 40 periods
i d @ 4.5% = 0.17193 x
50,000,000 = $8,596,500
Price of bonds: $46,003,950 + $8,596,500 = $54,600,450
Cash 54,600,450
Premium on B/P 4,600,450
Bonds Payable 50,000,000

©Dr. Chula King

All Rights Reserved

Problem 14-1 (continued)

Part 3: Assume Broadcourt Electronics purchased the entire issue in a
private placement of the bonds. Using the data in requirement 2,
prepare the journal entry to record the purchase by Broadcourt
Semiannual cash interest: 10% x 50,000,000 x 6/12 = $2,500,000
Due at maturity: $50,000,000
Present value of interest: Table 4, 40 payments @ 4.5% = 18.40158 x
2,500,000 = $46,003,950
Present value
l off $50,000,000:
$ Table
bl 2, 40 periods
i d @ 4.5% = 0.17193 x
50,000,000 = $8,596,500
Price of bonds: $46,003,950 + $8,596,500 = $54,600,450
Investment in Bonds 50,000,000
Premium on B/P 4,600,450
Cash 54,600,450

©Dr. Chula King

All Rights Reserved