On January 1, 2016, Bishop Company issued 12% bonds dated January 1, 2016, with
ID: 2427296 • Letter: O
Question
On January 1, 2016, Bishop Company issued 12% bonds dated January 1, 2016, with a face amount of $100,000. The bonds mature in 2020 (5 years). For bonds of similar risk and maturity, the market yield is 14%. Interest is paid semiannually on June 30 and December 31.
: 1. Determine the price of the bonds at January 1, 2016.
2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2016.
3. Prepare the journal entry to record interest on June 30, 2016, using the straight line method.
4. Prepare the journal entry to record interest on December 31, 2016, using the straight line method.
Explanation / Answer
Statemnet showing Price or Intrinsic Value Particulars Time PVf @7% Amount PV Cash Flows (Interest) 0.50 0.9346 6,000.00 5,607.48 Cash Flows (Interest) 1.00 0.8734 6,000.00 5,240.63 Cash Flows (Interest) 1.50 0.8163 6,000.00 4,897.79 Cash Flows (Interest) 2.00 0.7629 6,000.00 4,577.37 Cash Flows (Interest) 2.50 0.7130 6,000.00 4,277.92 Cash Flows (Interest) 3.00 0.6663 6,000.00 3,998.05 Cash Flows (Interest) 3.50 0.6227 6,000.00 3,736.50 Cash Flows (Interest) 4.00 0.5820 6,000.00 3,492.05 Cash Flows (Interest) 4.50 0.5439 6,000.00 3,263.60 Cash Flows (Interest) 5.00 0.5083 6,000.00 3,050.10 Cash flows (Maturity Amount) 5.00 0.5083 100,000.00 50,834.93 Intrinsic Value of Bond or Current Bond Price 92,976.42 Discount = 100,000 - 92,976.42 =$7,023.58 Journal Entries Subscription Date Particulars Dr Amt Cr Amt 1-Jan-16 Cash A/C Dr 92,976.42 Discount on Bonds payable Dr 7,023.58 To Bonds Payable 100,000.00 30-Jun-16 Interest Expense Dr 6,702.36 To Discount on Bonds Payable 702.36 To Cash 6,000.00 (100,000*12%*1/2) 31-Dec-16 Interest Expense Dr 6,702.36 To Discount on Bonds Payable 702.36 To Cash 6,000.00 (100,000*12%*1/2)
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