On January 1, 2017, Shirley Corporation puchased 10% bonds dated January 1, 2017

Question

On January 1, 2017, Shirley Corporation puchased 10% bonds dated January 1, 2017, with a face amount of $10 million. The bonds mature in 10 years. For bonds of similiar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

1. record journal entry to record the bond purchase by Shirley on January 1, 2017

2. prepare journal entry to record interest on June 30, 2017, using the effective interest method.

3. prepare journal entry to record interest on December 31, 2017, using the effective interest method

Explanation / Answer

principal          10,000,000 interest                500,000 (10,000,000*5%) bonds issue price where I = 6% t= 20 years principal * PV of $1 =    10,000,000 * 0.3118 =      3,118,000 interest * PV of ordinary annuity =          500,000 * 11.46992 =      5,734,960 Bonds issue price      8,852,960 Journal entries Date Account titles & Explanations Debit Credit 1/1/2017 Cash      8,852,960 Discount on bonds payable      1,147,040 Bonds payable    10,000,000 6/30/2017 interest expense (8852960*6%) 531178 discount on bonds payable 31178 cash 500000 12/31/2017 interest expense (8852960+31178)*6% 533048 discount on bonds payable 33048 cash 500000

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