Question

On July 1, 20Y1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $5,100,000 of 7-year, 10% bonds at a market (effective) interest rate of 12%, receiving cash of $4,625,950. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year

Required:

For all journal entries, if an amount box does not require an entry, leave it blank.

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 20Y1.

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.

b. The interest payment on June 30, 20Y2, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.

3. Determine the total interest expense for 20Y1. 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 $4,625,950 received for the bonds by using the present value tables in Appendix A. Round your PV values to 5 decimal places and the final answers 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. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 20Y1.

July 1	Cash	4625950
	Discount on bonds payable	474050
	Bonds payable		5100000

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.

Dec 31	Interest expense	288861
	Discount on bonds payable (474050/14)		33861
	Cash (5100000*10%*6/12)		255000

b. The interest payment on June 30, 20Y2, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.

June 30	Interest expense	288861
	Discount on bonds payable		33861
	Cash		255000

3. Determine the total interest expense for 20Y1. Round to the nearest dollar.
$288861

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?

When Market rate of interest higher than face amount of bonds

5. Compute the price of $4,625,950 received for the bonds by using the present value tables in Appendix A. Round your PV values to 5 decimal places and the final answers to the nearest dollar. Your total may vary slightly from the price given due to rounding differences.

Present value of the face amount (5100000*0.4423)	$2255730
Present value of the semiannual interest payments (255000*9.29498)	2370220
Price received for the bonds	$4625950