In: Accounting
Bond Discount, Entries for Bonds Payable Transactions
On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $3,800,000 of 8-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $3,601,220. 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.
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.
b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method.
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?
5. Compute the price of $3,601,220 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 | $ |
Date | Accounts Title | Dr | CR | |
1 | Cash | $3,601,220 | ||
Jul-01 | Discount on Bonds payable | $198,780 | ||
Bonds Payable | 3800000 | |||
a) | Interest expenses | $202,424 | ||
Dec 31 year 1 | Discount on Bonds payable 198780/16 | $12,424 | ||
Cash (3800000*5%) | 190000 | |||
b) | Interest expenses | $202,424 | ||
Dec 31 year 1 | Discount on Bonds payable 198780/16 | $12,423.75 | ||
Cash (3800000*5%) | 190000 | |||
3) | Total interest expense of Year 1 | $202,424 | ||
4) | Yes, if market rate is more than the coupon rate than the bonds are issued at discount | |||
because in market more interest is paid for similar bonds hence bonds are issued at discount. | ||||
in $ | ||||
5) | Present value of the face amount | $3800000*PVIF(5.5%,16) | 1613408 | 1613409 |
Present value of the semiannual interest payments | 190000*PVIFA(5.5%,16) | 1987811 | 1987811 | |
Price received for the bonds | 3601219 | 3601220 | ||
just $1 difference so added in PV of face amount | ||||
If any doubt please comment |