Final answer:
The price of The Bradford Company's bonds is found by discounting the semiannual interest payments and principal repayment at the market yield of 12%, taking into account the time value of money. Journal entries for bond issuance and interest payments include the recognition of bond payable, cash, discount on bonds payable, interest expense, and the amortization of the bond discount.
Step-by-step explanation:
To determine the price of the 10% bonds issued by The Bradford Company with a face amount of $80 million, we need to calculate their present value using both the interest and principal payments discounted at the market yield of 12%. As the bonds pay interest semiannually, we would use the 6% semiannual market yield (half of the 12% annual rate) for discounting the cash flows. Assuming the semiannual interest payment (called a coupon) is 10% of $80 million divided by 2, that gives us $4 million every six months. We will use the present value formulas for an annuity (for the interest payments) and a lump sum (for the principal repayment).
The journal entry to record the issuance on January 1, 2021, would typically credit 'Bonds Payable' for the face amount of the bond and debit 'Cash' and 'Discount on Bonds Payable' for the actual proceeds received from the investors minus the face amount if sold at a discount. The discount represents the difference between the market yield and the bond's coupon rate and is amortized over the life of the bond.
On June 30, 2021, for the first interest payment, the company would debit 'Interest Expense' for the interest at the effective rate and credit 'Cash' for the interest paid. If sold at a discount, they would also debit 'Discount on Bonds Payable' as part of the amortization process. The 'Interest Expense' is higher than the actual cash paid because it includes the amortization of the bond discount.
The journal entry for December 31, 2021, would be similar to that of June 30, but the 'Interest Expense' would need to incorporate any additional amortization of the bond discount since the last payment.
The aforementioned calculations and entries are based on the principles of accounting for bonds and the time value of money, which represent a key part of financial decision-making in business.