Question

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.

Answer 1

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