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

Answer 1

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