Question

Part 2--Sample Bond problem on recording bonds payable: On January 1, 2016, Shirley Corporation purchased 10% bonds dated January 1, 2016, with a face amount of $10 million. The bonds mature in 2025 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. Required:

1. Determine the price of the bonds at January 1, 2016.

2. Prepare the journal entry to record the bond purchase by Shirley on January 1, 2016.

3. Prepare the journal entry to record interest on June 30, 2016, using the effective interest method.

4. Prepare the journal entry to record interest on December 31, 2016, using the effective interest method.

5. What is the book value of the bond issue on December 31, 2016?

Hint: Bond price = $8,852,960 Amortization of discount for #4: 33,048 Book value at 12/31/16 = $8,917,186.

Answer 1

Requirement 1:

Interest payment = $10,000,000 x 5% = $500,000

Present value of interest payments	$5,734,960
[$500,000 x 11.46992 present value annuity factor (6%, 20 years)]
Present value of face value	$3,118,000
[$10,000,000 x 0.31180 present value factor (6%, 20 years)]
Price of the bonds	$8,852,960

Requirement 2:

Date	Account title and Explanation	Debit	Credit
Jan 1,2016	Cash	$8,852,960
	Discount on bonds payable	$1,147,040
	Bonds payable		$10,000,000
	[To record issuance of bonds]

Requirement 3:

Date	Account title and Explanation	Debit	Credit
June 30,2016	Interest expense [8,852,960 x 6%]	$531,178
	Discount on bonds payable		$31,178
	Cash		$500,000
	[To record payment of interest on bonds payable]

Requirement 4:

Date	Account title and Explanation	Debit	Credit
Dec 31,2016	Interest expense [(8,852,960 + 31,178) x 6%]	$533,048
	Discount on bonds payable		$33,048
	Cash		$500,000
	[To record payment of interest on bonds payable]

Requirement 5:

Issue price of the bonds	$8,852,960
Add: Discount amortized during 2016 (31,178+33,048)	$64,226
Book value on Dec 31,2016	$8,917,186