Question

On January 1, 2018, Bishop Company issued 8% bonds dated January 1, 2018, with a face amount of $21.0 million. The bonds mature in 2027 (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, 2018.
2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2018.
3. Prepare the journal entry to record interest on June 30, 2018, using the effective interest method.
4. Prepare the journal entry to record interest on December 31, 2018, using the effective interest method.

Answer 1

Issue price of bonds = (21000000*4%*12.46221)+(21000000*0.37689) = $18382946

Journal entry

Date	account and explanation	debit	credit
Jan 1	Cash	18382946
	Discount on bonds payable	2617054
	Bonds payable		21000000
	(To record bond issue)
June 30	Interest expense (18382946*5%)	919147
	Discount on bonds payable		79147
	Cash (21000000*8%*6/12)		840000
	(To record interest)
Dec 31	Interest expense (18382946+79147)*5%	923105
	Discount on bonds payable		83105
	Cash		840000
	(To record interest)