Question

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $3,000,000 of 6-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $2,867,050. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1. For a compound transaction, if an amount box does not require an entry, leave it blank.

	Cash
	Discount on Bonds Payable
	Bonds Payable

2. Journalize the entries to record the following: For a compound transaction, if an amount box does not require an entry, leave it blank. Round your answer to the nearest dollar.

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method.

	Interest Expense
	Discount on Bonds Payable
	Cash

b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method.

	Interest Expense
	Discount on Bonds Payable
	Cash

3. Determine the total interest expense for Year 1. Round to the nearest dollar.
$

4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest?
Yes

5. Compute the price of $2,867,050 received for the bonds by using Table 1, Table 2, Table 3 and Table 4. (Round to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.

Present value of the face amount	$
Present value of the semiannual interest payments
Price received for the bonds	$

Answer 1

1	July 1, Year 1	Cash	2867050
		Discount on bonds payable	132950
		Bonds payable		3000000
2a.	Dec. 31, Year 1	Interest expense	146079
		Discount on bonds payable ($132950/12)		11079
		Cash ($3000000 x 9% x 1/2)		135000
2b.	June 30, Year 2	Interest expense	146079
		Discount on bonds payable ($132950/12)		11079
		Cash ($3000000 x 9% x 1/2)		135000

3. Total interest expense for Year 1: $146079

4. Yes

When the contract rate on the bonds is less than the market rate of interest, the bonds will be less attractive to investors and will hence be issued at a discount due to which bond proceeds will be less than the face amount of the bonds.

5.

Present value of the face amount	1670520
($3000000 x 0.55684) [PV i=5%, n=12]
Present value of the semiannual interest payments
($135000 x 8.86325) [PVA i=5%, n=12]	1196539
Price received for the bonds	2867059

Note: The factors used are rounded up to 5 decimal places. Kindly use appropriately from the tables since the same have not been provided with the question. The answer will vary if factors given with question are with a different number of decimal places.