McWherter Instruments sold $470 million of 10% bonds, dated January 1, on Januar
ID: 2533415 • Letter: M
Question
McWherter Instruments sold $470 million of 10% bonds, dated January 1, on January 1, 2018. The bonds mature on December 31, 2037 (20 years). For bonds of similar risk and maturity, the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Blanton Technologies, Inc., purchased $470,000 of the bonds as a long-term investment. Ey of cipy of S. EVA Of S. P VA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required 1. Determine the price of the bonds issued on January 1, 2018. 2. Prepare the journal entries to record (a) their issuance by McWherter and (b) Blanton's investment on January 1, 2018. 3. Prepare the journal entries by (a) McWherter and (b) Blanton to record interest on June 30, 2018 (at the effective rate) 4. Prepare the journal entries by (a) McWherter and (b) Blanton to record interest on December 31, 2018 (at the effective rate) Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3Required 4 Determine the price of the bonds issued on January 1, 2018. (Enter your answer in whole dollars.) Bond priceExplanation / Answer
Solution:
Coupon rate on bond = 10%, 5% semi annual
Market rate of interest = 12%, 6% semi annual
Period of maturity = 20 years, 40 semiannual period
Issue price of bond = Present value of interest and principal discounted at market rate of interest
= ($470,000,000 *5%) * Cumulative PV factor at 6% for 40 periods + $470,000,000 * PV Factor at 6% for 40th period
= $23,500,000 * 15.0463 + $470,000,000 * 0.097222 = $399,282,405
Solution 2:
Solution 3:
Solution 4:
Journal Entries - Mcwherter Date Particulars Debit Credit 1-Jan-18 Cash Dr $399,282,405.00 Discount on issue of bond Dr $70,717,595.00 To Bond Payable $470,000,000.00 (Being bond issued at discount)