Question

On January 1, 2021, Bishop Company issued 8% bonds dated January 1, 2021, with a face amount of $20.7 million. The bonds mature in 2030 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Round your intermediate calculations to the nearest whole dollar.)

Required:
1. Determine the price of the bonds at January 1, 2021.
2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2021.
3. Prepare the journal entry to record interest on June 30, 2021, using the effective interest method.
4. Prepare the journal entry to record interest on December 31, 2021, using the effective interest method.

Answer 1

1. Bonds price = Interest payment*PVIAF(5%, 20 years) + maturity amount*PVIF(5%, 20 years)

= $20700000*8%*6/12*12.462+20700000*0.377 = $18122436

2.

Date	Accounts	Debit	Credit
January 1, 2021	Cash	$18122436
	Discount on Bonds Payable	$2577564
	Bonds Payable		$20700000
June 30, 2021	Interest expense (18122436*10%*6/12)	$906122
	Discount on Bonds Payable		$78122
	Cash (20700000*8%*6/12)		$828000
December 31, 2021	Interest expense (18122436+78122)*10%*6/12)	$910028
	Discount on Bonds Payable		$82028
	Cash (20700000*8%*6/12)		$828000