On January 1, 2018, Bishop Company issued 8% bonds dated January 1, 2018, with a
ID: 2610657 • Letter: O
Question
On January 1, 2018, Bishop Company issued 8% bonds dated January 1, 2018, with a face amount of $20.2 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.
Explanation / Answer
Solution 1:
Face value of bond = $20.2 million
Coupon rate = 8%
Period = 10 year, 20 semi annual period
Yield = 10%, 5% semi annual
Bond price = Present value of future cash flows discounted at yield rate
= (20200000*4%) * cumulative PV factor @ 5% for 20 periods + 20200000* PV factor at 5% at 20 period
= $808,000 * 12.46221034 + $20,200,000*0.376889 = $17,682,634
Solution 2-4:
Bond Schedule - Effective Interest method Period Opening Balance Interest expense Interest Paid Closing Balance 1 $17,682,634 $884,132 $808,000 $17,758,766 2 $17,758,766 $887,938 $808,000 $17,838,704 3 $17,838,704 $891,935 $808,000 $17,922,639 4 $17,922,639 $896,132 $808,000 $18,010,771 5 $18,010,771 $900,539 $808,000 $18,103,310 6 $18,103,310 $905,165 $808,000 $18,200,475 7 $18,200,475 $910,024 $808,000 $18,302,499 8 $18,302,499 $915,125 $808,000 $18,409,624 9 $18,409,624 $920,481 $808,000 $18,522,105 10 $18,522,105 $926,105 $808,000 $18,640,210 11 $18,640,210 $932,011 $808,000 $18,764,221 12 $18,764,221 $938,211 $808,000 $18,894,432 13 $18,894,432 $944,722 $808,000 $19,031,153 14 $19,031,153 $951,558 $808,000 $19,174,711 15 $19,174,711 $958,736 $808,000 $19,325,447 16 $19,325,447 $966,272 $808,000 $19,483,719 17 $19,483,719 $974,186 $808,000 $19,649,905 18 $19,649,905 $982,495 $808,000 $19,824,400 19 $19,824,400 $991,220 $808,000 $20,007,620 20 $20,007,620 $1,000,381 $808,000 $20,200,001