On january1, 2016, Bishop company issued 10% bonds dated january 1, 2016, with a

Question

On january1, 2016, Bishop company issued 10% bonds dated january 1, 2016, with a face amount of $20 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.

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

1 Interest ($1,000,000 x 11.46992) = $        11,469,920 Principle ($20,000,000 x 0.31180) = $          6,236,000 Price of bonds $        17,705,920 General Journal Debit Credit 2 Cash $                      17,705,920 Discount on bonds payable $                         2,294,080 Bonds payable $ 20,000,000 3 Interest expense (6% x $17,705,920) $                         1,062,355 Discount on bonds payable (Diff) $          62,355 Cash (5% x $20,000,000) $    1,000,000 4 Interest expense (6% x $17,705,920 + $62,355) $                         1,066,097 Discount on bonds payable (Diff) $          66,097 Cash (5% x $20,000,000) $    1,000,000

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