On January 1, 2021, Bishop Company issued 8% bonds dated January
1, 2021, with a face amount of $21.0 million. The bonds mature in
2030 (10 years). For bonds of similar risk and maturity, the market
yield is 10%. Interest is paid semiannually on June 30 and December
31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD
of $1) (Use appropriate factor(s) from the tables provided. Round
your intermediate calculations to the nearest whole dollar.)
Required:
1. Determine the price of the bonds at January 1,
2021.
2. Prepare the journal entry to record the bond
issuance by Bishop on January 1, 2021.
3. Prepare the journal entry to record interest on
June 30, 2021, using the effective interest method.
4. Prepare the journal entry to record interest on
December 31, 2021, using the effective interest method
Solution 1:
Chart Values are based on: | |||||
n= (10 Years*2) | 20 | Half years | |||
i= (10%/2) | 5% | Semi annual | |||
Cash Flow | Table Value | * | Amount | = | Present Value |
Par (Maturity) Value | 0.37689 | * | $2,10,00,000 | = | $79,14,679 |
Interest (Annuity) [$21,000,000*8%*6/12] | 12.46221 | * | $8,40,000 | = | $1,04,68,257 |
Price of Bonds | $1,83,82,936 |
Solution 2, 3 and 4:
Bishop Company | |||
Journal Entries | |||
Date | Particulars | Debit | Credit |
01-Jan | Cash A/c Dr | $1,83,82,936 | |
Discount on bond Payable Dr | $26,17,064 | ||
To bonds payable | $2,10,00,000 | ||
(Being bond issued at Discount) | |||
Date | Particulars | Debit | Credit |
30-Jun | Interest Expense Dr ($18,382,936*10%*6/12) | $9,19,147 | |
To Discount on Bond payable | $79,147 | ||
To Cash ($21,000,000*8%*6/12) | $8,40,000 | ||
(To record first Interest Payment and Amortization of discount on issue) | |||
Date | Particulars | Debit | Credit |
31-Dec | Interest Expense Dr [($18,382,936+79147)*10%*6/12] | $9,23,104 | |
To Discount on Bond payable | $83,104 | ||
To Cash ($21,000,000*8%*6/12) | $8,40,000 | ||
(To record second Interest Payment and Amortization of Discount on issue) |
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