II. On November 1, 20x1, Bush Company issued 10% bonds with a face amount of $20
ID: 2333143 • Letter: I
Question
II. 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.
Please all 4 questions, I think I have the price right but would like to make sure my answers are correct before turning it in, thank you
Explanation / Answer
Answer 1 Face Value[a] $20,000,000 Annual coupon rate[b] 10.00% Semi annual coupon rate[c] 5.00% Semi annual coupon[a*c] $1,000,000 Time to Maturity (In years) 10 Semiannual period to Maturity 20 Annual Market Rate 12.00% Semi annual coupon rate[c] 6.00% Proceeds from Issue $17,706,016 $1,000,000*PVIFA(6%,20)+$20,000,000*PVIF(6%,20) ($1,000,000*(1-(1/1.06)^20)/.06)+($20,000,000/1.06^20) Answer 2 Date General Journal Debit Credit Nov 01 , 20x1 Cash $17,706,016 Discount on Bonds $2,293,984 To Bonds Payable $20,000,000 Answer 3 Date General Journal Debit Credit Dec 31 , 20x1 Interest Expense ($17,706,016*6%*2/6) $354,120 To Discount on Bonds $20,787 To Interest Payable ($1,000,000*2/6) $333,333 Apr 30 , 20x2 Interest Expense ($17,706,016*6%*2/6) $708,241 Interest Payable $333,333 To Discount on Bonds $41,574 To Cash $1,000,000 Oct 31, 20x2 Interest Expense ($17,706,016*6%*6/6) $1,062,361 To Discount on Bonds $62,361 To Cash $1,000,000 Answer 4 Date General Journal Debit Credit Dec 31 , 20x2 Interest Expense ($17,706,016*6%*2/6) $354,120 To Discount on Bonds $20,787 To Interest Payable ($1,000,000*2/6) $333,333 Apr 30 , 20x3 Interest Expense ($17,706,016*6%*2/6) $708,241 Interest Payable $333,333 To Discount on Bonds $41,574 To Cash $1,000,000 May 01, 20x3 Bond Payable $20,000,000 Loss on Redemption of Bonds $2,706,901 To Discount On Bond $2,106,901 ($2,293,984-$41,574-$62,361-$20,787-$41,574) To Cash $20,600,000 ($20,00,000*1.03)