On January 1, 2006, Shirley Corporation purchased 10% bonds dated January 1, 200

Question

On January 1, 2006, Shirley Corporation purchased 10% bonds dated January 1, 2006, with a face amount of $10 million. The bonds mature in 2015 (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, 2006.

2. Prepare the journal entry to record the bond purchase by Shirley on January 1, 2006.

3. Prepare the journal entry to record interest on June 30, 2006, using the effective interest method.

4. Prepare the journal entry to record interest on December 31, 2006, using the effective interest method.

Explanation / Answer

1

From PV tables Principal $     10,000,000 0.3118 $ 3,118,000 Interest @10% per annum $       1,000,000 11.46992 $11,469,920 Price of the bond at January 1, 2006 $14,587,920

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