Question

On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2018.

2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2018.

3. Prepare the journal entry to record interest on June 30, 2018, using the effective interest method.

4. Prepare the journal entry to record interest on December 31, 2018, using the effective interest method.

Answer 1

Answer 1.

Face Value = $20,000,000

Annual Coupon Rate = 10%
Semiannual Coupon Rate = 5%
Semiannual Coupon = 5%*$20,000,000
Semiannual Coupon = $1,000,000

Annual Interest Rate = 12%
Semiannual Interest Rate = 6%

Time to Maturity = 10 years
Semiannual Period to Maturity = 20

Price of Bonds = $1,000,000 * PVIFA(6%, 20) + $20,000,000 * PVIF(6%, 20)
Price of Bonds = $1,000,000 * (1 - (1/1.06)^20) / 0.06 + $20,000,000 / 1.06^20
Price of Bonds = $1,000,000 * 11.4699 + $20,000,000 * 0.3118
Price of Bonds = $17,705,900

Answer 2.

Answer 3.

Interest Expense = $17,705,900 * 6%
Interest Expense = $1,062,354

Semiannual Coupon = $1,000,000

Amortization of Discount = Interest Expense - Semiannual Coupon
Amortization of Discount = $1,062,354 - $1,000,000
Amortization of Discount = $62,354

Answer 4.

Carrying Value = $17,705,900 + $62,354
Carrying Value = $17,768,254

Interest Expense = $17,768,254 * 6%
Interest Expense = $1,066,095

Semiannual Coupon = $1,000,000

Amortization of Discount = Interest Expense - Semiannual Coupon
Amortization of Discount = $1,066,095 - $1,000,000
Amortization of Discount = $66,095