On January 1, 2013, Bishop Company issued 10% bonds dated January 1, 2013, with
ID: 2460909 • Letter: O
Question
On January 1, 2013, Bishop Company issued 10% bonds dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2020 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. The price of the bonds at January 1, 2013 is $17,705,920 Required: 1. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2013. 2. Prepare the journal entry to record interest on June 30, 2013, using the effective interest method.
Explanation / Answer
Answer:
In the books of Bishop Company:
Journal for Bonds issue using effective rate of interest:
Date
Particulars
Debit
Amount ($)
Credit
Amount ($)
January 1, 2013
Cash A/c…………Dr
Discount on Bonds Payable A/c
To 10% Bonds A/c
(Being 10% bonds issued for a discount)
17,705,920.00/-
2,294,080.00/-
-
-
20,000,000.00/-
June 30, 2013
Interest Expense A/c…. Dr
To Cash A/c
To Discount on Bonds Payable A/c
(Being Interest Paid Semi-annually)
1,062,355.20/-
-
-
-
1,000,000.00/-
62,355.20/-
Working Notes:
Date
Interest Payment
Interest Expense
Amortization of Bond
Discount on Bonds Payable
Face Value
Book Value
January 1, 2013
2,294,080.00
20,000,000.00
17,705,920.00
June 30, 2013
1,000,000.00
1,062,355.20
62,355.20
-2,231,724.80
20,000,000.00
17,768,275.20
Date
Particulars
Debit
Amount ($)
Credit
Amount ($)
January 1, 2013
Cash A/c…………Dr
Discount on Bonds Payable A/c
To 10% Bonds A/c
(Being 10% bonds issued for a discount)
17,705,920.00/-
2,294,080.00/-
-
-
20,000,000.00/-
June 30, 2013
Interest Expense A/c…. Dr
To Cash A/c
To Discount on Bonds Payable A/c
(Being Interest Paid Semi-annually)
1,062,355.20/-
-
-
-
1,000,000.00/-
62,355.20/-
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