Answer:
a. Determine the price of the bonds at January 1, 2021.
market price:
PV of face value = $33,000,000 / 1.04²⁰ = $15,060,769
PV of coupon payments = $990,000 x 13.590 (PV annuity factor, 4%, 20 periods) = $13,454,100
market price = $28,514,869
b. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2021.
Dr Cash 28,514,869
Dr Discount on bonds payable 4,485,131
Cr Bonds payable 33,000,000
c. Prepare the journal entry to record interest on June 30, 2021, using the effective interest method.
amortization of bond discount = ($28,514,869 x 4%) - $990,000 = $150,595
Dr Interest expense 1,140,595
Cr Cash 990,000
Cr Discount on bonds payable 150,595
d. Prepare the journal entry to record interest on December 31, 2021, using the effective interest method.
amortization of bond discount = ($28,665,464 x 4%) - $990,000 = $156,619
Dr Interest expense 1,146,619
Cr Cash 990,000
Cr Discount on bonds payable 156,619
