Question

On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face amount of $19.3 million. The bonds mature in 2027 (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, 2018. 2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2018. 3. Prepare the journal entry to record interest on June 30, 2018, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2018, using the effective interest method.

Answer 1

1) $19.3 million in bonds issued January 1, 2018

coupon rate 10%, semiannual 5% interest

maturity = 10 years x 2 = 20 periods

market interest rate = 12% / 2 = 6% semiannual

1) market price of the bonds:

PV of face value = $19,300,000 / (1 + 6%)²⁰ = $6,017,831.23

PV of coupon payments = $965,000 x 11.470 (PV annuity factor, 6%, 20 periods) = $11,068,550

market price = $17,086,381.23 ≈ $17,086,381

2) January 1, 2018, bonds issued at a discount

Dr Cash 17,086,381

Dr Discount on bonds payable 2,213,619

Cr Bonds payable 19,300,000

3) June 30, 2018, first coupon payment

Dr Interest expense 1,025,183

Cr Cash 965,000

Cr Discount on bonds payable 60,183

amortization of bond discount = ($17,086,381 x 6%) - $965,000 = $1,025,182.86 - $4,860,000 = $60,182.86 ≈ $60,183

4) December 31, 2018, second coupon payment

Dr Interest expense 1,028,794

Cr Cash 965,000

Cr Discount on bonds payable 63,794

amortization of bond discount = ($17,146,564 x 6%) - $965,000 = $1,028,793.84 - $965,000 = $63,793.84 ≈ $63,794