On January 1, 2016, Bishop Company issued 10% bonds dated January 1, 2016, with
ID: 2475062 • Letter: O
Question
On January 1, 2016, Bishop Company issued 10% bonds dated January 1, 2016, with a face amount of $19.5 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. (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. Enter your answers in whole dollars.)
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 effective interest method.
4. Prepare the journal entry to record interest on December 31, 2016, using the effective interest method.
Explanation / Answer
Answer:1
Since interest is paid semiannually, therefore, market yield will be 6%(12%/2) and no. of years will be 20(10*2)
Interest: (20000000*10%/2)*PVIFA(6%,20) = 1000000*11.46992 = 11469920
Principal: 20000000*PVIF (6%,20) = 20000000*0.31180 = 6236000
Total = 11469920+ 6236000= 17705920
Answer:2
Cash Dr..17705920
Discount on bonds payable Dr.2294080
To bonds payable........................................20000000
Answer:3
Interest expense (6%*17705920) Dr.1062355
To Discount on bonds payable...............................62355
To cash(5%*20000000)........................................1000000
Answer:4
Interest expense [6%(17705920+62355)] Dr........1066097
To discount on bonds payable...........................................66097
To cash..........................................................................1000000
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