Question

On November 1, 20x1, Bush Company issued 10% bonds with a face amount of $20 million. The bonds mature in 10 years. For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on April 30 and October 31. Bush is a calendar-year corporation.

​

​Required:

(1.) Determine the price of the bonds at November 1, 20x1.

(2.) Prepare the journal entry to record the bond issuance by Bush on November 1, 20x1.

(3.) Prepare the journal entries (using the effective interest method):

a. December 31, 20x1

b. April 30, 20x2

c. October 31, 20x2

​*Assume no reversing entry is recorded on January 1, 20x2.

(4.) What would be the journal entry if all bonds are retired at 103 on May 1, 20x3 right after the third payment.

Answer 1

Solution 1:

Computation of bond price
Table values are based on:
n=	20
i=	6%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.311805	$20,000,000.00	$6,236,095
Interest (Annuity)	11.469921	$1,000,000.00	$11,469,921
Price of bonds			$17,706,016

Solution 2:

Journal Entries - Bush Company
Date	Particulars	Debit	Credit
1-Nov-20X1	Cash A/c Dr	$17,706,016.00
	Discount on issue of bond Dr	$2,293,984.00
	To Bonds payable		$20,000,000.00
	(Being bond issued at discount)

Solution 3:

Bond Amortization Table
Semiannual interest period end	Cash interest paid	Bond Interest Expense	Discount Amortization	Unamortized Discount	Carrying Value
Issue date				$2,293,984	$17,706,016
30-Apr-20X2	$1,000,000	$1,062,361	$62,361	$2,231,623	$17,768,377
31-Oct-20X2	$1,000,000	$1,066,103	$66,103	$2,165,520	$17,834,480
30-Apr-20X3	$1,000,000	$1,070,069	$70,069	$2,095,452	$17,904,548

Journal Entries - Bush Company
Date	Particulars	Debit	Credit
31-Dec-20X1	Interest Expense Dr ($17,706,016*12%*2/12)	$354,120.00
	To Interest payable ($20,000,000*10%*2/12)		$333,333.00
	To Discount on issue of bond		$20,787.00
	(To record interest accrued)
30-Apr-20X2	Interest Expense Dr ($17,706,016*12%*4/12)	$708,241.00
	Interest Payable Dr	$333,333.00
	To Cash		$1,000,000.00
	To Discount on issue of bond		$41,574.00
	(To record seminannual interest payment and discount amortization)
31-Oct-20X2	Interest Expense Dr	$1,066,103.00
	To Cash		$1,000,000.00
	To Discount on issue of bond		$66,103.00
	(To record seminannual interest payment and discount amortization)

Solution 4:

Journal Entries - Bush Company
Date	Particulars	Debit	Credit
1-May-20X3	Bonds Payable Dr	$20,000,000.00
	Loss on redemption of bond Dr	$2,695,452.00
	To Cash ($20,000,000*103%)		$20,600,000.00
	To Discount on issue of bond		$2,095,452.00
	(To record redemption of bond before maturity)