On January 1 2017 Bishop Company issued 12 bonds dated Janua

On January 1, 2017, Bishop Company issued 12% bonds dated January 1, 2017, with a face amount of $20 million. The bonds mature in 10 years. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

1. Determine the price of the bonds at January 1, 2017

2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2017.

3. Prepare the journal entry to record interest on June 30, 2017, using the effective interest method.

4. Prepare the journal entry to record interest on December 31, 2017, using the effective interest method.

Solution

1) Price of bonds at January 1, 2017 $ 2,24,92,442.07 2) Date Account titles and explanation Debit Credit January 1, 2017 Cash $ 2,24,92,442.07 Bonds Payable $       2,00,00,000 Premium on bonds payable $     24,92,442.07 (To record issuance of bonds) 3) Date Account titles and explanation Debit Credit June 30, 2017 Interest Expenses $     11,24,622.10 Premium on Bonds payable $           75,377.90 Cash $     12,00,000.00 4) Date Account titles and explanation Debit Credit December 31, 2017 Interest Expenses $     11,20,853.21 Premium on Bonds payable $           79,146.79 Cash $     12,00,000.00 Workings: Price of Bond is the Present Value of cash flow from bond. a. Semi annual period Cash flow Discount factor Present Value 1-20 $                  12,00,000                                                 12.4622 $ 1,49,54,652.41 20 $              2,00,00,000                                                   0.3769 $     75,37,789.66 Current Price $ 2,24,92,442.07 b. Semi annual coupon interest = Par Value x Semi annual Coupon Interest rate = $       2,00,00,000 x 6% = $           12,00,000 c. Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.05)^-20)/0.05 i 5% =                   12.4622 n 20 d. Present Value of 1 = 1.05^-20 =                     0.3769 e. Amortization table: Semi annual period Interest paid in cash Interest expense Premium amortization Unamortized premium Carrying Value Jan 1, 2017 $     24,92,442.07 $ 2,24,92,442.07 June 30, 2017 $                  12,00,000 $                                   11,24,622.10 $           75,377.90 $     24,17,064.17 $ 2,24,17,064.17 December 31, 2017 $                  12,00,000 $                                   11,20,853.21 $           79,146.79 $     23,37,917.38 $ 2,23,37,917.38