Question

On January 1, 2011, Bishop Company issued 10% bonds dated January 1, 2011, with a face amount of $20 million. The bonds mature in 2020 (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, 2011.

2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2011.

3. Prepare the journal entry to record interest on June 30, 2011, using the effective interest method.

4. Prepare the journal entry to record interest on December 31, 2011, using the effective interest method.

Answer 1

Semi annual cash interest = 20000,000*10%*6/12 =	10,00,000
Issue price:
n= 20
I = 6%
Cashflows		Amount	PVF	Present value
Semi annual cash interest	10,00,000	11.46992	11469920
Maturity amount		2,00,00,000	0.311805	6236100
Price of bonds				17706020
Amort Chart:
Period	Cash int	Int Expense	Discount	unamortized	Carrying
			amortized	discount	value of bonds
01.01.11				22,93,980	1,77,06,020
30.06.11	10,00,000	1062361	62,361	22,31,619	1,77,68,381
31.12.11	10,00,000	1066103	66103	21,65,516	1,78,34,484
Journal entries
S.no.	Accounts title and explanations		Debit $	Credit $
01.01.11	Cash				1,77,06,020
	Discount on bonds payable		22,93,980
	Bonds payable				2,00,00,000
	(for bonds issued)
30.06.11	Interest expense			1062361
	Cash account				1000000
	Discount on bonds payable			62361
	(for interest expense)
31.1211	Interest expense			1066103
	Cash account				1000000
	Discount on bonds payable			66103
	(for interest expense)