Question

# On January 1 2016, Liberty Purchased 10% bonds, dated January 1 2016, with a face amount...

On January 1 2016, Liberty Purchased 10% bonds, dated January 1 2016, with a face amount of \$20 million. The bonds mature in 2025 (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 2016.

2. Prepare the journal entry to record the purchase by Liberty on January 1,2016.

3. Prepare the journal entry to record interest on june 30,2016, using the straight line method.

4. Prepare the journal entry to record interest on December 31. 2016, using the straight line mehtod.

 1) principal 20000000 interest (20000000*5%)= 1000000 price of bonds where i=6% t = 20 years principal * PV of \$1 = 20000000 0.3118 = 6236000 interest PV of ordinary annuity 1000000 * 11.46992 = 11469920 Bonds issue price 17705920 2) Date Accounting titles & Explanations Debit Credit 1/1/2016 Cash 17705920 Discount on bonds payable 2294080 Bonds payable 20000000 3) 6/30/2016 interest expense 1114704 Discount on bonds payable 114704 Cash 1000000 4) 12/31/2016 interest expense 1114704 Discount on bonds payable 114704 Cash 1000000

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