Question

On January 1, 2019, Bishop Company issued 8% bonds dated January 1, 2019, with a face amount of $20 million. The bonds mature in 2028 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

Determine the price of the bonds at January 1, 2019. Show computations

Prepare the journal entry to record the bond issuance by Bishop on January 1, 2019.

Prepare the journal entry to record interest on June 30, 2019, using the effective interest method.

Prepare the journal entry to record interest on December 31, 2019, using the effective interest method.

What is the book value of the bonds at December 31, 2019? Show computations.

Date	Accounts	Debit	Credit

Answer 1

Requirement 1:

Interest payment = $20,000,000 x 4% = $800,000

Present value of interest payments	$9,969,768
[$800,000 x 12.46221 present value annuity factor (5%, 20 years)]
Present value of face value	$7,537,800
[$20,000,000 x 0.37689 present value factor (5%, 20 years)]
Price of the bonds	$17,507,568

Requirement 2:

Date	Account title and Explanation	Debit	Credit
Jan 1,2019	Cash	$17,507,568
	Discount on bonds payable	$2,492,432
	Bonds payable		$20,000,000
	[To record issuance of bonds]

Requirement 3:

Date	Account title and Explanation	Debit	Credit
June 30,2019	Interest expense [17,507,568 x 5%]	$875,378
	Discount on bonds payable		$75,378
	Cash		$800,000
	[To record payment of interest on bonds payable]

Requirement 4:

Date	Account title and Explanation	Debit	Credit
Dec 31,2019	Interest expense [(17,507,568 + 75,378) x 5%]	$879,147
	Discount on bonds payable		$79,147
	Cash		$800,000
	[To record payment of interest on bonds payable]

Requirement 5:

Issue price of the bonds	$17,507,568
Add: Discount amortized during 2016 (75,378+79,147)	$154,525
Book value on Dec 31,2019	$17,662,093