Question

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.

Answer 1

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