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. Required:
a. Determine the price of the bonds at January 1, 2018.
b. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2018.
c. Prepare the journal entry to record interest on June 30, 2018, using the effective interest method.
d. Prepare the journal entry to record interest on December 31, 2018, using the effective interest method.

A. 17,682,634

B. Dr Cash 17,682,634

Dr Discount on Bonds Payable 2,517,366

Cr Bonds Payable 20,200,000

C. 6/30/2018

Dr Interest Expense 884,132

Cr Discount on Bonds Payable 76,132

Cr Cash 808,000

D. 12/31/2018

Dr Interest Expense 887,938

Cr Discount on Bonds Payable 79,938

Cr Cash 808,000

Explanation:

a. Calculation to Determine the price of the bonds at January 1, 2018

.

Using financial calculation to Determine the price of the bonds

First step is to calculate the principle using financial Calculator

Face value=20,200,000

N=20

I=5

PMT=0

CPT PV=7,613,168

Second step is to calculate the interest

N=20

I=5

PMT=(20,200,000*8%*(6/12))=808,000

FV=0

(CPT PV=10,069,466)

Now let calculate the price of the bonds

Price of the bonds =7,613,618+10,069,466

Price of the bonds =17,682,634

Therefore the price of the bonds at January 1, 2018 will be 17,682,634

b. Preparation of the journal entry to record the bond issuance by Bishop on January 1, 2018.

1/1/2018

Dr Cash 17,682,634

Dr Discount on Bonds Payable 2,517,366

(20,200,000-17,682,634)

Cr Bonds Payable 20,200,000

c. Preparation of the journal entry to record interest on June 30, 2018, using the effective interest method.

6/30/2018

Dr Interest Expense 884,132

(17,682,634*10%*(6/12))

Cr Discount on Bonds Payable 76,132

(884,132-808,000)

Cr Cash 808,000

(20,200,000*8%*(6/12))

d. Preparation of the journal entry to record interest on December 31, 2018, using the effective interest method.

12/31/2018

Dr Interest Expense 887,938

[17,682,634 - 76,132*10%*(6/12)]

Cr Discount on Bonds Payable 79,938

(887,938-808,000)

Cr Cash 808,000

(20,200,000*8%*(6/12))

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