I. On November 1, 20x1, Bush Company issued 10% bonds with a face amount of $20
ID: 2332971 • Letter: I
Question
I. 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.
Explanation / Answer
1) Face Value $20,000,000.00 Coupon Rate = 10%/2 5.00% Coupon Payment $1,000,000.00 Period = 10 x 2 20 YTM = 12%/2 6.00% Present Value (PV(6%,20,-1000000,-20000000) $17,706,015.76 2) Date Accounts Debit Credit Nov 1, 20x1 Cash $17,706,015.76 Discount on Issue of Bonds $2,293,984.24 Bonds Payable $20,000,000.00 Period Interest Paid = $20,000,000 x 5% Interest Expense = $17706015.76 x 6% Amortizable Discount Non-amortizable Discount Carrying Value Nov 1 $2,293,984.24 $17,706,015.76 Apr 1 $1,000,000.00 $1,062,360.95 -$62,360.95 $2,231,623.30 $17,768,376.70 Oct 1 $1,000,000.00 $1,066,102.60 -$66,102.60 $2,165,520.70 $17,834,479.30 Apr 1 $1,000,000.00 $1,070,068.76 -$70,068.76 $2,095,451.94 $17,904,548.06 Dec 31, 20x1 Interest Expense (1,062,360.95 x 2/6) $354,120.32 Discount on Bonds Payable $20,786.98 Interest Payable $333,333.33 Apr. 30 , 20x2 Interest Payable $333,333.33 Interest Expenses $708,240.63 Discount on Bonds Payable $41,573.96 Cash $1,000,000.00 Oct.31,20x2 Interest Expenses $1,066,102.60 Discount on Bonds Payable $66,102.60 Cash $1,000,000.00 3) Interest Expenses $1,070,068.76 Discount on Bonds Payable $70,068.76 Cash $1,000,000.00 Bonds Payable $20,000,000.00 Loss on Bond Retirement $2,695,451.94 Discount on Bonds Payable $2,095,451.94 Cash $20,600,000.00