Question

In January 1, 2021, Bishop Company issued 10% bonds dated January 1, 2021, with a face amount of $19.2 million. The bonds mature in 2030 (10 years). For bonds of similar risk and maturity, the market yield is 12%. 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.

Answer 1

Ans:

1
Table Values are based on
n=20
i=6%
Cash flow	Amount	Present value
Interest	$         960,000.00	$        11,011,123
Principal	$    19,200,000.00	$          5,986,560
Price of bonds		$        16,997,683

S.No	Date	Account Title	Debit	Credit
2	Jan-01	Cash	$        16,997,683
		Discount on Bonds Payable	$          2,202,317
		Bonds Payable		19,200,000
		(To record the Issuance of Bonds)
3	Jun-30	Interest Expense	$          1,019,861
		Discount on Bonds Payable		$          59,861
		Cash		$       960,000
		(To record the Interest paid)
4	Dec-31	Interest Expense	$          1,023,453
		Discount on Bonds Payable		$          63,453
		Cash		$       960,000
		(To record the Interest paid)

Calculations:

Workings:
Coupon Payment	=	Par Value	*	Semi annual coupon rate
	=	$   19,200,000.00	*	5.00%
	=	$        960,000.00
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+ 0.06)^- 20)/ 0.06	i	=	6.00%
	=	11.46992		n	=	20
Present value of 1	=	(1+i)^-n
	=	(1+ 0.06)^- 20
	=	0.31180
Present value of coupon	=	Coupon Payment	*	Present value of annuity of 1
	=	$        960,000.00	*	11.46992
	=	$        11,011,123
Present value of par value	=	Par Value	*	Present value of 1
	=	$   19,200,000.00	*	0.31180
	=	$          5,986,560

Period End	Cash Interest Paid	Bond Interest Expense	Premium Amortisation/-Discount Amortisation	Carrying Value
				$          16,997,683
	$                960,000.00	$           1,019,861.00	$       -59,861.00	$    17,057,544.20
	$                960,000.00	1023453	$       -63,453.00	$    17,120,997.20
	$                960,000.00	1027260	$       -67,260.00	$    17,188,257.20