Universal Foods issued 10% bonds, dated January 1, with a face amount of $150 million on January 1, 2016. The bonds mature on December 31, 2030 (15 years). The market rate of interest for similar issues was 12%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. Required: 1. Determine the price of the bonds at January 1, 2016. 2. Prepare the journal entry to record their issuance by Universal Foods on January 1, 2016. 3. Prepare the journal entry to record interest on June 30, 2016. 4. Prepare the journal entry to record interest on December 31, 2023.

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Asked Jan 21, 2020
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Universal Foods issued 10% bonds, dated January 1, with a face amount of $150 million on January 1, 2016. The bonds mature on December 31, 2030 (15 years). The market rate of interest for similar issues was 12%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. Required: 1. Determine the price of the bonds at January 1, 2016. 2. Prepare the journal entry to record their issuance by Universal Foods on January 1, 2016. 3. Prepare the journal entry to record interest on June 30, 2016. 4. Prepare the journal entry to record interest on December 31, 2023.

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Expert Answer

Step 1

Since we are entitled to answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question and specify the other subparts (up to 3) you’d like to get answered.

Present value is the current value of a future amount that is to be received or paid out.

Future value means the value of asset at the specified date in the future or it is the amount that states how much the current investment will grow in over time.

Step 2
  1. The price of bonds on 1st Jan:

Future value= 150,000,000

Number of years= 15 × 2= 30

Rate of interest= 12% ÷ 2= 6%

Interest= $150,000,000 × (10 % ÷ 2) = $7,500,000

To calculate present value of bonds:

Present value of $150,000,000= 150,000,000 × 0.17411 = $26,116,500

(the value 0.17411 is taken from the table of present value of annuity, $1 where r=6% n=30)

Present value of interest= $7,500,000 × 13.76483= $103,236,225

(the value 13.76483 is taken from the table of present value of ordinary annuity, $1 where r=6% n=30)

Present value of bond= present value of principal + present value of interest

                                   = $26,116,500 + $103,236,225

                                   = $129,352,725

Step 3
  1. Journal entry to record issuance o...
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