Question 27 15 pts On January 1, 2016, Field Company purchased 10% bonds, dated

Question

Question 27 15 pts

On January 1, 2016, Field Company purchased 10% bonds, dated January 1, 2016, with a face amount of $20 million. The bonds mature in 2025 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2016.
2. Prepare the journal entry to record the bond purchase by Field on January 1, 2016.
3. Prepare the journal entry to record interest on June 30, 2016, using the effective interest method.

Explanation / Answer

1 Amount PV factor Present value Semi-annual interest 1000000 11.46992 11469920 Maturity value 20000000 0.3118 6236000 Issue price 17705920 Price of the bonds at January 1, 2016 = $17705920 2 Jan-1-16 Bond investment 20000000         Discount on bond investment 2294080         Cash 17705920 3 Jun-30-16 Cash 1000000 Discount on bond investment 62355        Interest revenue 1062355 =17705920*12%/2

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