After Edward S. White, the inventor of a process for constructing a superior fiber for trunk-making, demonstrated the practicability of his process, the Ironclad Trunk Corporation purchased all his rights in patents granted by United States, Canada, Mexico, and Great Britain. The sale went into effect January 1, 1914. The consideration of $100,000 was made payable $60,000 in cash, $20,000 in bonds at par, and $20,000 in two-year interest bearing notes of the company.
To provide for payment of the patent, the corporation, after duly complying with all legal requirements, issued $100,000 in 20-year 6% sinking fund bonds, under date of December 1, 1913, interest payable June 1 and December 1. During the month $70,000 of the bonds were sold for cash on a 7% basis, and the remainder at the same price during the following month.
The trust agreement provided that a sinking fund should be established by a charge against profits every interest period, of an amount sufficient on a 4% compound interest basis—interest compounded semiannually—to retire the bonds at maturity. The fund was placed in a trust company for accumulation.
(a) Give journal entries to effect the foregoing on the corporation’s books.
(b) Prepare a statement setting forth the condition of the sinking fund at each interest date during the last five years previous to maturity of the bonds.
Instructions
It will be noted that the problem requires the calculation of the selling price of the bonds, i.e., their valuation on the given basis. This may be found from bond tables but preferably by the formula of [Chapter XV]. The sinking fund may also be found from tables or the formula of [Chapter XXV].
(1.035⁴⁰ = 3.95925972; 1.02³¹ = 1.84758882; and 1.02⁴⁰ =2.20803966)
X
(a) Prepare an amortization schedule covering the first five years life of the bonds.