On January 1, 2016, Bishop Company issued 12% bonds dated January 1, 2016, with

Question

On January 1, 2016, Bishop Company issued 12% bonds dated January 1, 2016, with a face amount of $100,000. The bonds mature in 2020 (5 years). For bonds of similar risk and maturity,the market yield is 10%. Interest is paid semiannually on June 30 and December 31 . (SHOW AMORITIZATION SCHEDULE)

Required:

1. Determine the price of the bonds at January 1, 2016.

2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2016.

3. Prepare the journal entry to record interest on June 30, 2016, using the effective interest method method.

4. Prepare the journal entry to record interest on December 31 , 2016, using the effective interest method.

Explanation / Answer

1) Price of the bond = PV of Bonds Interest Payments + PV of Bonds MATURITY Amount PV of Bonds Interest Payments Half yearly interest = 6% 0f 100000 = 6000 n = 10 ( 5*2) r = Market rate = 5% NPV = Interest * ( 1-(1+i)-n)/i           = 6000 * ( 1-(1+0.05)-10)/0.05           = 6000 * ( 1 -0.6139)/0.05 = 6000 * 7.922           = 47532 NPV of bonds maturity value @ 5% for 5 years = 10000 * PV of 1 table = 100000 * 0.614    = 61400 Hence market price of the bond = 47532 + 61400 = 108932 2) 01-Jan-16 Cash Dr 108932         Bonds Payable Cr 100000         Bonds premium Cr 8932 ( To record issuance of bond ) Amortization table - effective interest method A B C D E F G Date Interest Payment Interest Expense Amortization of Credit balance Credit balance BV of stated Mkt @ 5% Bond Prem in Bond premium in Bond Payable Bond 6% * facevalue * prev BV C-B account F + E 01-Jan-16 8932 100000 108932 30-Jun-16 6000 5446.60 -553.40 8378.60 100000 108378.60 01-Jan-15 6000 5418.93 -581.07 7797.53 100000 107797.53 3) June 30,2016 Interest Expense Dr 5446.60 Bonds Premium Dr 553.40           Cash Cr 6000.00 ( To record interest expense for June 30) 4) December 31,2016 Interest Expense Dr 5418.93 Bonds Premium Dr 581.07          Interest Payable Cr 6000.00 ( To record interest expense for December 31)

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